How to Start a Sole Proprietorship in Alabama
This guide will cover all of the necessary steps and information you may need to fully understand what a sole proprietorship means and how to go about starting one in Alabama.
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What is a sole proprietorship?
A sole proprietorship is an informal business structure that represents an unincorporated business owned by a single person (or, in some cases, spouses).
Many people are already operating a sole proprietorship without knowing it. Since there is no required paperwork, anyone who freelances or sells goods under their own name is operating a sole proprietorship.
Examples of sole proprietors
A freelancer on Upwork, an artist selling their work on Etsy, or an IT consultant are all sole proprietors. If you collect money for goods or services rendered, you’re considered a sole proprietorship.
What qualifies your business as a sole proprietorship?
A sole proprietor is any person that sells goods or services. You can’t work with a partner. You don’t need a business name either, you can sell goods under your own legal name.
No. One of the main reasons people like sole proprietorships is because it’s easy to set up. You do not need to file any paperwork with the state. However, if you want to conduct business under a company name as opposed to your legal name, you need to file a DBA, or ‘doing business as.’
Sole proprietorship vs. LLC
A limited liability company, or LLC, can be run by multiple owners, provides liability protection, and is treated as a separate legal entity. LLC owners must file paperwork with the state and pay filing fees.
A sole proprietorship is not a legal entity and offers no liability protection. There’s no official paperwork filed with the state.
Who is it best for?
For many people, a sole proprietorship is the ideal way to form a business because of its simplicity and flexibility. Often people just starting a business or wanting to test out self-employment will opt for this structure as it doesn’t require a lot of time and money to start and can make those first steps accessible.
The structure of a sole proprietorship is meant for small-scale businesses run by an individual. While they can have employees, it is usually a small number of employees and wouldn’t require extensive capital investments or complex decision-making to run smoothly. Often this is the best fit for those in professional services, who can work independently and manage their business with direct control.
If you are looking to run a solo venture or startup and want complete control over your business without a large cost, a sole proprietorship is likely the best choice for you.
How to start a sole proprietorship in Alabama
Alabama does not require a sole proprietorship to be registered with the Secretary of State in order to operate. Essentially, by doing any sort of business for yourself under your own name, you are already a sole proprietorship, according to Alabama. But if you want to take more official steps or expand your business, there are ways that the state accommodates that.
Naming a sole proprietorship in Alabama
A sole proprietorship is automatically considered to be operating under its owner’s legal name. While this can work in some cases, many business owners choose to operate under a business name other than their own. To do this, you will need to file a trade name with Alabama’s Department of State.
All trade names must be unique, so you will first need to check the state legal entity records website to be sure that your chosen name is available. You may also want to consider other rules, like that the name cannot be misleading and cannot use certain government terms.
Once you choose your name, you need to start using it for your business before it can be registered. Alabama will require you to provide at least three acceptable business items with the name on it – this includes things like flyers, business cards, signs, and labels.
Once you can provide these, you can file for your DBA, or doing business as, and pay the $31.20 fee. The name is then protected by Alabama law and cannot be used by other businesses.
How to Check if a Business Name is Taken
Permits and licenses in Alabama
Sole proprietors in Alabama are not required to have any general business licenses in the state, though they may have to have a privilege license. These are issued by the probate judge in the county where the business is located and have varying fees.
Depending on your business’s industry, you may also need to obtain specific licenses and permits. For example, an accountant or lawyer may need to have licensing through the state before they can provide professional services.
It is also important to understand local laws and regulations. Your city or county may require certain licenses, zoning fees, permits, or even fees for running a home business. Be sure to contact your local city or county clerk to find out what you need to operate legally.
Alabama taxes
Sole proprietors pass-through income made by the business to their personal taxes. You’ll pay federal taxes and state taxes, if your state levies them, on your annual tax returns.
A sole proprietorship is automatically run under the owner’s legal name and uses their Social Security Number as a tax identification number. This also means that the owner is personally responsible for any and all debts, litigation, and liabilities of the business.
Pros
- Simplicity: Starting a sole proprietorship requires very few business forms and formalities, making it fast and inexpensive.
- Flexibility: A sole proprietor has complete ownership and control over their business’s direction. This means decisions and changes can be implemented quickly, without approvals.
- Tax benefits: Sole proprietorship owners report business income and expenses on their personal tax returns, which can be advantageous and simpler than filing business taxes.
- Privacy: Unlike incorporations, sole proprietorships do not have to disclose any financial information publicly.
Cons
- Personal liability: Sole proprietors are personally responsible for all business debts and obligations of the business, which can put personal assets at risk due to their unlimited liability.
- Access to resources: Sole proprietorships are not eligible for many grants and financial resources that other businesses may have access to, and can also have trouble finding the proper expertise to run their business. For example, sole proprietorships cannot usually open a business bank account and maintain business assets.
- Self-employment taxes: While a sole proprietorship has tax benefits, the owner may also need to pay self-employment taxes to cover their own Medicare and other tax payments.
- Sole responsibility: Being the owner of a sole proprietorship means that you will carry all the burden of the business, which can be stressful. You may need a backup plan for times when you are sick or unable to work.
FAQs
Is a sole proprietorship the same as freelancing?
Anyone who works as a freelancer can be the sole proprietor of their business. However, a freelancer cannot do some things a sole proprietorship can, like hiring employees. They also may not have to adhere to the same local regulations as a sole prop. A freelancer is a person with external clients, while a sole proprietorship is a small business.
Do sole proprietorships have to register in Alabama?
No, Alabama’s Department of State does not require any kind of formal registration for a sole proprietorship. They would need to register for a trade name and any applicable licenses, but you can operate as a sole proprietorship in Alabama without any formalities being completed beforehand.
Will a sole proprietorship in Alabama need a privilege license?
Alabama requires any business to have a business privilege license, including a sole proprietorship. This is a license obtained from the county probate court where a business operates that covers the general ability to do business in the county. Exact costs vary by location.
Do sole proprietorships need an EIN?
An EIN, or employer identification number, is a tax ID that the IRS uses to track a business’s tax payments. Entrepreneurs running a sole proprietorship do not need to set up an EIN, as profits and losses are filed through their individual tax returns on Schedule C. However, if the business has employees, they do need an EIN in order to cover things like payroll taxes.
What’s the difference between a sole proprietorship and a partnership?
A sole proprietorship has one owner. A partnership has two or more. If you plan to work alone, you’ll set up a sole proprietorship. If you plan to work with a friend or business associate, you should set up a partnership.
How do you prove you have a sole proprietorship?
You can prove you have a sole proprietorship by showing your income tax returns, which have a Schedule C that showcases the business profits or losses made as a business.
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