One of the most difficult aspects of getting a fledgling business off the ground is finding the cash to cover expenses before your company begins to turn a profit. Even after securing financing from a bank loan or angel investor, paying for offices, materials, advertising, and funding payroll present a heavy cash burden, not to mention the unforeseen costs that inevitably come up. In fact, a lack of cash flow is the main reason businesses fail.
That’s why Alabama is a great state to start a business in: it offers a nurturing, low-cost environment for budding entrepreneurs. At just 0.33%, Alabama has the third-lowest property tax in the United States, and the state also boasts a low progressive income tax of just 2-5%. That’s not all, the Cotton State is one of the most affordable states to live and do business in, ranking #11 in the cost of living in the country.
While Alabama is not mentioned in the same breath as startup hotspots like California and Massachusetts, it won’t empty your company bank account like those expensive states so easily do. For entrepreneurs searching for a state where their business can grow and flourish without a suffocating load of expenses, look no further than Alabama.
Starting a Business in Alabama? Check out our ranking of the Best Cities to Live in Alabama.
Alabama small business statistics at-a-glance
- Alabama is 11th in the cost of living among the fifty states.
- With a property tax rate of 0.33%, Alabama ranks 3rd in the country.
- Alabama has a progressive income tax of 2-5%, with earners of over $3,000 paying the highest rate.
- The main industries in the state are food, textiles, apparel, lumber, and industrial machinery.
- There are over 388,000 small businesses operating in the state, employing around 772,000 people and accounting for 99.4% of total businesses in Alabama.
- The top industries for small business employment in Alabama are health care and social assistance, accommodation and food services, and retail trade.
Starting a business in Alabama in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
- Is there a demand for your product/service in Alabama?
- Who is your target market?
- Do existing businesses in Alabama offer a similar product/service?
- What makes your business unique compared to the competition?
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the Alabama market for your business idea.
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in Alabama.
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors. Plenty of both types of investors are operating in Alabama.
Alabama Angel Investors and VCs
- Advantage Capital – A Huntsville-based firm that has invested almost $2.6 billion in over 700 Alabama companies since 1992 in a wide range of industries, including food products, mobile apps, and health technology.
- AIM Group – An investment group operating in the Southeastern United States boasting 300 members in 9 chapters that have invested over $42 million in small businesses in the region.
- Alabama Launchpad – The most active early-stage seed fund investor in the state, active since 2006. The organization has invested over $4 million in 86 startups and boasts a current valuation of $212 million.
- Greer Capital Advisors – An Alabama based firm that provides capital for growth and late-stage businesses in the region. Investments typically range between $100,000 and $2 million dollars with an average holding period of 3-5 years.
Additional Investor Resources
- Innovation Depot – A bustling accelerator, incubator, and co-working space in downtown Birmingham that provides a home for 100+ young companies employing over 800 workers.
- Angel.co: Alabama Angel Investors – A listing of nearly 5000 angel investors interested in investing in Alabama-based businesses. Clicking on their profiles will give a tally of their investments along with the types of businesses they are interested in investing in.
- TechBirmingham – Not an investment group, but instead an organization that fosters the region’s technology ecosystem with technology training programs and entrepreneurial events.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
6. Register your business
For sole proprietorships
Next, it’s time to make your business official in the state of Alabama. Once you have a name for your business (think of a good one!), head to the Alabama Secretary of State Business Services page to register.
Obtaining a Certificate of Existence in the state will cost you a fee of $27 or $28 depending on whether you are an Alabama Interactive subscriber.
For LLCs and corporations
Registering an LLC or corporation in Alabama requires filing additional forms and costs at least $150: including a $100 filing fee to the Secretary of State and a minimum Probate Judge fee of $50. The process requires you to appoint a registered agent to receive official government communications on the LLC or corporation’s behalf.
As long as you have an address in Alabama, you can be your own registered agent, but if you don’t have experience with the process you should consider appointing a professional for assistance.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
To file state taxes for your business in Alabama, go to the Alabama Department of Revenue: Register an Entity page and click “Begin the Registration Process”. You can register many types of entities, including a sole proprietorship, a corporation, or an LLC.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Major business banks operating in Alabama
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
Head to the Business Licensing page of the Alabama Department of Revenue for guidance and information on procuring the types of licenses and permits you’ll need for operating your business in the state.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
Entrepreneurs hoping to launch a business in Alabama should strongly consider Birmingham, a large city of over 200,000 in the north-central part of the state. Of all of Alabama’s population centers, Birmingham has proven to be the most exciting and promising city for young entrepreneurs.
The city’s startup community is robust and growing, with the region boasting 119 biotech companies that have received over $2 billion in VC investments and research grants. The community is centered around Innovation Depot, an incubator and coworking space providing a home to over 100 companies and 800 jobs in the city.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
Alabama small business resources
- Alabama Secretary of State: Business Services – The Alabama SoS’s portal where you can reserve a business name and register your business.
- Alabama Small Business Development Center Network – A statewide program partnered with many of Alabama’s universities that provides management and technical assistance to small businesses.
- Made in Alabama: Small Business – Loaded with resources for entrepreneurs, including the latest Alabama business news, local area success stories, and links to several workforce development programs.
- Southern Development Council – Provides small business loans for companies in the southeastern United States.
- SBA.gov: Alabama District Office – The SBA’s Alabama office. Includes a calendar of upcoming events.
- Auburn Business Incubator – Auburn University’s full-service incubator provides the perfect environment for getting local businesses off the ground.
- Bessemer Business Incubation System – A large, Bessemer-based incubator with two locations.
- Alabama Department of Economic and Community Affairs – Contains info about the state’s small business credit initiative.
- Alabama Microenterprise Network – Connects Alabama entrepreneurs with microbusiness service providers.
- Alabama Registered Agent – Provides registered agent services for forming a corporation or an LLC in the state, starting at $49 a year.