How to Start a Sole Proprietorship in Alabama?

Sole Proprietorship in Alabama

Alabama is home to more than four hundred thousand small businesses including sole proprietorships operating from commercial spaces as well as in residential areas. Most home-based businesses in the state prefer to file a sole proprietorship in Alabama as opposed to other types of entities like corporations or limited-liability companies. There are several other reasons why first time business owners prefer this type of business entity. These include a robust industrial infrastructure in the state and an excellent business climate. Alabama is also known to have a low tax burden and availability of a highly motivated workforce which makes it just the right place to conduct business in any industry or sector. You can form a sole proprietorship in Alabama online and start leveraging state benefits right from small business loans to varied repertoire of tax credit programs.

What is a sole proprietorship in Alabama?

In order to be informed on how to start a sole proprietorship in Alabama, you need to first try and understand what this type of business entity constitutes. A sole proprietorship is considered to be an unincorporated business that is owned and operated by one individual. This form of entity is often known as a sole trader and some of the top examples of such businesses include photographers, bakery owners, graphic designers or freelance programmers, dental clinics, and pet rescues among others. It is easy to start a sole proprietorship in Alabama as it has several advantages over other forms of businesses including less paperwork, documentation, lower taxes, and overall minimal cost of operation.

Pros and cons of sole proprietorship in Alabama

Although a sole proprietorship is the most basic of all entity structures, it has a certain advantage over several other bigger structures. This type of non-registered single-individual run business also has its disadvantages. Hence, it is important to identify the pros and cons to help you determine whether you should form a sole proprietorship in Alabama online or go with some other business structure.

Pros

Every type of business structure has a set of advantages that makes the entity different from other structures. If you start a sole proprietorship in Alabama there are several advantages:

• The biggest advantage of a sole proprietorship is that it is inexpensive and easy to form this entity
• You will be able to protect the business name in a sole proprietorship as the legal name will be your personal name unless you want to use an Alabama DBA
• Ownership is a great advantage as being the only owner, you will have complete control over the company operations
• Once you file a sole proprietorship in Alabama, you will be able to participate in key state incentive programs including jobs tax credit
• Forming a sole proprietorship means you will have simpler income tax obligations
• Banking operations would also be simpler vis à vis corporations or other form of entities

Cons

Each type of business structure has disadvantages or limitations including a sole proprietorship entity. Let’s look at some of the disadvantages:

• If you opt to file a sole proprietorship in Alabama then you will not be able to enjoy liability protection, which is a core strength area of an LLC (Limited Liability Company).
• It is often difficult for sole proprietorships to get financing through private investors or any form of business credit.
• This type of business may witness an increase in debts and unnecessary expenses
• A sole proprietor may be required to file self-employment taxes on their earnings

Steps to Start Sole Proprietorship in Alabama

If you are wondering how to start a sole proprietorship in Alabama then there are several processes to consider. There are different processes associated with forming a new business and making it operational. There are annual maintenance requirements of the state as well, which every new company in the state has to be compliant with. Let’s look at the various important processes and steps involved.

1. Prepare a business plan

If you have decided to file a sole proprietorship in Alabama then one of the immediate tasks is to identify the risks associated with forming this business and mitigating them. This is possible by creating a detailed plan that takes into account different functions and aspects of the business. This type of strategic plan is most commonly known as a business plan. It is not just a way of identifying risks but is also a roadmap that will indicate growth prospects, and factors that can contribute towards making the business sustainable and profit oriented. The most common elements including in any sole proprietorship business plan are:

• Executive Summary
• Company Description
• Concept behind the specific business/activity
• Long and short-term Objectives
• Competition Analysis
• Market analysis
• Product and Services
• Target audience
• Operating plan
• Marketing Plan and Sales Tactics
• Financial Plan and Projection

2. Choose an Alabama business name

The name of a business is as important to a sole proprietorship as is the name to an individual. It serves the same purpose. A business is known by the name. The name plays a key role in various aspects of the overall process of forming a company and conducting the business right from marketing and branding to opening a bank account or communicating with the state and the customers. The name will also be useful for registering a domain name and setting up a website. So, here are some important tips that will get you started.

• It is important to think of a name that is easy to spell and remember
• Try to choose a name that is not similar to that of a competitor
• Follow the naming guidelines of the state of Alabama
• You can take help of online business name generators
• Your company can use your name (e.g. – James Long Sandwiches) or you can opt for an Alabama DBA
• While choosing a name, take into consideration your products, services, and customers (e.g. – James Alabama Bakery)
• Be sure to check for availability as a domain name for your website
• Try to secure trademark protection for your chosen business name

3. File fictitious business name

If you are thinking of the processes connected to how to start a sole proprietorship in Alabama then the first step would be to file a fictitious business name. A fictitious business name is also known as a DBA (doing business as). In the state of Alabama, it is also known as a trade name.

Do you want to start a sole proprietorship in Alabama?

4. Get EIN

If you want to start a sole proprietorship in Alabama, you will be required to file personal income tax as well as any other state taxes. A sole proprietorship is a single owner company and hence the owner or individual has to file income taxes using his or her Social Security Number (SSN). There is another option, which is to opt for an Employer Identification Number (EIN) as this can be quite beneficial in the long-term. According to the IRS (Internal Revenue Service), there are certain criterias that come into play when applying for an EIN and they are:

• If a sole proprietorship business starts hiring employees
• If such a company plans to open a business bank account
• If you or the owner has a Keogh plan
• If you are required to file excise tax returns
• If you change the entity structure like from a sole proprietorship to a limited-liability company If you file Chapter 7 (liquidation) or Chapter 11 (reorganization) bankruptcy

5. Obtain necessary licenses and permits

If you are wondering how to start a sole proprietorship in Alabama then one of the important areas to focus on is the type of licenses that your company may require. Licensing of a sole proprietorship business is primarily for ensuring that such a company maintains safety standards where the public is concerned. If you file a sole proprietorship in Alabama, then you will need to apply for proper licenses and permits to make your business operational.

Business licensing in the state of Alabama can be categorized as under:

• Business Privilege License
• Professional licenses
• Municipal or local licenses
• Regulated licenses
• Zoning permits

6. Open a bank account for your Alabama business

One of the easiest entity structures that you can form is a sole proprietorship but you need to ensure that it remains compliant with all Alabama business requirements. One such requirement apart from an Alabama DBA is that of a business bank account. This type of banking account, also known as a checking account is considered to be separate from a personal savings account. The primary advantages of a business bank account is to help you in management of all types of business finances, filing of taxes, and limiting your personal liability.

7. Report and pay taxes

If you start a sole proprietorship in Alabama then you will be the owner of the company in the books of the Internal Revenue Service (IRS). Hence, you will be required to file the owner’s individual tax returns on state income tax. The individual income tax rate varies in the state from 2 percent to 5 percent and certain jurisdictions have to also collect local income taxes. If you form a sole proprietorship in Alabama online then you may be required to file Alabama Business Privilege Tax (ABPT). If your company has employees then you will have to file withholding tax as well. Apart from these, depending on the industry or location of the company, a sole proprietorship may be subjected to a variety of local taxes including sales tax.

Know more about starting an Alabama Sole Proprietorship!

If you are faced with several queries on how to start a sole proprietorship in Alabama efficiently and operate it with ease then our “Frequently Asked Questions” can provide the right answers. We have created this section to provide quick access to helpful information that will assist in good decision making.

Do you have to register a sole proprietorship in Alabama?

If you are planning to file a sole proprietorship in Alabama then it will not be considered as a legal entity structure. This is the very reason why you will not be required to register the company with the Alabama Secretary of State. However, if you want to file an Alabama DBA then you will have to submit a DBA registration form with the Office of Secretary of State, Trademarks Division.

What is the difference between a sole proprietorship and an LLC in Alabama?

It is important to choose the right business structure as this will determine the sustainability, growth, finances, and operations of the said business. The two popular entity structures that most first time business owners prefer are sole proprietorships and limited liability companies (LLC’s) due to their simplicity and flexibility. You can even form a sole proprietorship in Alabama online and later on if required convert the structure to that of an LLC.

How much does it cost to start a sole proprietorship in Alabama?

You are not required to file a sole proprietorship in Alabama with the office of the Secretary of State. This simply means that there will be no business registration costs although formation costs will take into account filing an Alabama DBA or trade name. If you file online then the cost is $31.20 and if you submit by mail then the fee is $30. There is a renewal fee of $10 each year as well. Apart from this, the costs will vary according to the type of business licenses and permits required and taxes being filed. The sole proprietorship may also incur other expenses like renting or leasing of office space, utility bills, and employee salary

What taxes do sole proprietors pay in Alabama?

A sole proprietorship is a type of entity structure where the owner as well as the business are not seen as different entities. Hence, the primary tax will be that of personal income tax where the rate will vary from 2% to 5%. Other state taxes may also be applicable based on business activity, employees, and location. The Alabama business privilege tax has to be filed by all registered as well as disregarded entities like a sole proprietorship

Do sole proprietors need a business license in Alabama?

Yes. If you are planning to form a sole proprietorship in Alabama online then a business license will be mandatory to conduct transactions in this state. The most important of them is the privilege license, which you will need to obtain in every county you are planning to conduct your business in. Apart from this, you may also require municipal or local licenses, zoning permits, and professional licenses.

Should I convert my sole proprietorship to LLC in Alabama?

Once you start a sole proprietorship in Alabama, you may feel that a limited liability company suits your business objectives better. In such a situation, it is important to reason out if converting to an LLC is really necessary. A sole proprietor or sole trader is considered as a self-employed individual and hence there is always that risk of personal liability towards business debts and any other obligations. A limited liability company on the other hand will provide you with liability protection and since it’s a pass through entity, you will be filing personal tax returns just like in a sole proprietorship.

Ready to Start a Sole Proprietorship Business in Alabama

If you have taken a decision to file a sole proprietorship in Alabama then this is a good decision in terms of simplicity of structure and ease of formation. You will not be required to register your company with the Secretary of State unlike several other forms of businesses. However, you will be required to maintain different types of state annual maintenance compliances in order to enjoy a good standing with the state.