You’ve got an idea for an Alabama-based business, one that’s sure to hit the ground running. But before you make your first sale, you want to have your affairs in order — namely, choosing a structure, registering the business with the state, setting up taxes, and securing the right licenses.
What you’ll learn
What you’ll learn
Key takeaways for Alabama entrepreneurs
- Your business structure determines how your business is taxed and your personal liability protections. Common structures used by small business owners include sole proprietorship, limited liability company (LLC), and corporation.
- LLCs, corporations, and other formal businesses are required to register with the state of Alabama. Before registration, be sure to reserve your business name with the Secretary of State (SOS).
- All Alabama companies must secure a business privilege license with the counties where they conduct business. Other permits or licenses may be required, depending on the nature of your organization.
- Register for an employer identification number (EIN) from the IRS. It’s used for tax filings, regulatory forms, and financial transactions .
- Most Alabama counties require you to get zoning approval before conducting business, even if you plan on working from home. You can submit a zoning application to your city office.
In this guide, we’ll walk you through setting up a business in Alabama, including the key steps unique to the state and how to navigate them.
Choose the right legal structure for your Alabama business
As a new business owner, you can choose among three entity structures for your company: a sole proprietorship, an LLC, or a corporation.
Sole proprietorship
A sole proprietorship is the simplest type of business entity. You’re automatically considered a sole proprietor if you don’t adopt a formal Alabama business structure.
Opening a sole proprietorship doesn’t require filing official registration forms or paying registration fees to the state. All gross earnings flow to you, and you’re personally responsible for any debts or obligations the business incurs. Low-risk businesses benefit most from the sole proprietorship arrangement.
Limited liability company (LLC)
An LLC is a state-registered business entity that offers limited liability protection to its owners. Generally, you won’t be personally responsible for any debts or obligations your LLC incurs as long as you maintain strict separation between personal and business finances, obey applicable laws, and keep clear business records.
You can be the sole owner of an LLC or bring on additional partners. Single-member LLCs are typically taxed as a sole proprietorship, while multi-member LLCs are classified as a partnership for tax purposes. You can also opt for the business to be treated as an S Corporation or a C Corporation by the IRS.
An LLC arrangement works well for owners who want to protect their personal assets from business debts. The structure also requires fewer administrative burdens than corporations do.
Corporation
A corporation is probably the most complex form of business structure. There are two types: the C Corporation and the S Corporation.
- A C Corporation splits an owner’s assets from the business. Corporate earnings are taxed separately from the owner’s income. This results in double taxation, since the business pays taxes on income and the owner does, too. You may opt for a C Corporation structure if you want to limit personal liability and seek outside investment to grow the company.
- The S Corporation structure also limits personal liability for its owners or shareholders. However, profits may be distributed directly to the owners, thereby minimizing double taxation. While C Corporations can have an unlimited number of shareholders, S Corporations are limited to 100. An S corporation is a good option for small and mid-sized businesses that want to limit their liability while maintaining full control over the business.
You can use the table below to see all these options at a glance as well.
| Business structure | Personal liability protection | How the entity is taxed | Alabama Secretary of State requirements |
| Sole proprietorship | None (personal assets at risk) | Pass-through (profits reported on owner’s personal tax return) | No SOS registration required; local business privilege license required |
| Limited liability company (LLC) | Personal assets protected | Pass-through by default; optional S Corp or C Corp election | Name reservation ($25) + Certificate of Formation ($200 fee) |
| S Corporation | Personal assets protected | Pass-through allocated to shareholders (up to 100 shareholders) | Form an LLC or corporation, file IRS Form 2553, and SOS formation forms |
| C Corporation | Personal assets fully protected | Corporate income tax on profits, plus taxes on shareholder dividends | Name reservation ($25) + Articles of Incorporation ($200 fee) |
Register your business entity with the Secretary of State
Before registering your business in Alabama, you’ll want to decide on its name. You can use the state’s business entity search tool to confirm that the name you choose is available. The name should include a reference to your business structure. For example, a corporation may include the word “corporation” or its abbreviation, while an LLC may use the words “Limited liability company.”
Good to know
- Alabama requires owners to file a name reservation request before submitting a business registration form.
- You can do so online through the Alabama Secretary of State (SOS) portal or by mail. The fee is $25.
- After the Alabama SOS confirms your name reservation, you have 120 days to submit your entity formation documents by mail or through the online SOS portal. You’ll incur a filing fee of $200.
Appoint an Alabama registered agent
All formally registered businesses, including LLCs and corporations, are required to have a registered agent. This individual must have an Alabama address where they can receive official and legal mail for your company during standard business hours.
You can appoint yourself, an employee, or another individual as your registered agent. Some small businesses opt to use professional registered agent services for privacy and compliance reasons.
You’ll record your registered agent’s information in your company registration documents with the Alabama SOS.
Apply for an EIN and register for state taxes
After registering your business, you can apply for an employer identification number (EIN) with the IRS. You’ll use the EIN for:
- Tax reporting,
- Financial transactions
- Business banking
One way to think of it is as having a Social Security Number (SSN) for your business.
How to get your EIN in Alabama
The IRS accepts online EIN applications through its website. The process is fast and free. All you need is your SSN, business name, and entity type. If someone else applies for the EIN on your behalf, you must provide a signed authorization.
When you receive your EIN, you can register for state business taxes with the Alabama Department of Revenue (ALDOR). Your registration facilitates tax reporting for any state taxes your business may be liable for, such as sales and use tax and withholding tax. After registration, you can use the My Alabama Taxes system to file returns, manage your account, and submit payments.
To start the registration process, visit the ALDOR business registration page. You’ll need your company’s contact information, EIN, and NAICS code.
Secure necessary local permits and business licenses
Alabama doesn’t have a general state business license. However, all businesses (including sole proprietors) are required to obtain a business privilege license from each county where they operate.
You can obtain a business privilege license by visiting your local city office. Your office will review your application and determine whether any other Alabama business license requirements apply to you. Some business types may require special permits to operate, such as restaurants and legal services.
Most counties also require businesses to comply with zoning ordinances. These laws outline where a business can legally operate and the building codes it must follow. Industrial, commercial, and home-based businesses may need to submit a zoning compliance certification application and receive approval before conducting any transactions. Your city office can share the application and explain the requirements for your location.
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Open a business bank account and manage startup costs
No matter which business structure you choose, you’ll need a business bank account. Opening one maintains complete separation of your personal and business finances, simplifying accounting and taxes.
And in some cases, it’s required. For LLCs and corporations, a business bank account is legally necessary to retain the personal liability protection that those business structures offer.
Keeping a business bank account can also help you manage your startup costs, since you can view all of your expenses in one place. It’s a good idea to set up a budget from the get-go and carefully monitor your spending. Costs you may incur include:
- Business registration and legal fees
- Marketing and website development
- Starting inventory, supplies, and equipment
- Office rent and utilities
- Employee wages
What if you’re on a shoestring budget and want to start a business with $10,000 or less? Low overhead options include service-based businesses such as yard care, residential and commercial cleaning, digital marketing, and consulting. These types of companies don’t require expensive equipment or inventory, and you can start without employees.
Prepare for hiring and payroll compliance in Alabama
Your business may not stay small for long. As your company attracts more clients, handling every operational aspect yourself — from taxes to marketing — may not be feasible. That’s when you make the transition from founder to employer and hire workers who can support your business.
Of course, hiring employees comes with a new set of responsibilities, such as calculating payroll taxes, securing workers’ comp insurance, and staying on top of state unemployment insurance (SUI) tax rates and filings. You may also want to offer benefits, including health insurance and retirement plan options, which can help you attract and retain talented workers. Planning for these changes can make it easier to scale when the time comes.
OnPay is here to support your small business from day one. Our payroll and HR software makes payroll a breeze, enabling you to pay your employees in a few clicks. And with our HR tools, you can easily manage compliance and benefits. To learn more about OnPay, reach out to our team today.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.