A sole proprietorship is a common business structure because it is simple to set up and has few filing and tax requirements. As a sole proprietor, you are the sole owner and are personally responsible for the debts of the business. There are no registration requirements for starting an Alabama sole proprietorship, and you are not responsible for business tax. However, you may have additional filing and tax requirements depending on the type of business.
You may form a sole proprietorship in Alabama without filing any paperwork with the state. You may do business with a different name than your own, and you are not required to register the name. However, you have the option to file for a state trademark to ensure that your business is the only one in Alabama using your name. You may apply for trademark registration with the Alabama secretary of state, which will be effective for five years.
Depending on the type of business you are running, you may be responsible for a number of licenses before you can open your doors to the public. All Alabama businesses must obtain a local business license in the city or county where the business is located. The local probate judge issues local business licenses. Additionally, if you deal with food in your business, you will likely be responsible for a license from the Department of Health. Anyone in professional occupations, such as doctors or accountants, must be licensed by the state in order to do business.
Sole proprietorships do not pay business income tax. Instead the income passes through to the owner, who pays taxes on her personal tax return. However, if your business rents or sells goods, you are required to collect Alabama sales tax. As a vendor, you must apply for a sales tax license from the Alabama Sales and Use Tax Division before you can collect sales tax. You are required to make monthly payments of collected sales tax to the state. Additionally, businesses that sell alcohol, tobacco, gasoline, or natural resources are responsible for additional tax. There are a number of other taxes your business may be responsible for, and you should contact the state Department of Revenue to ensure that you that you are in compliance with state law.
Read More: Residency Requirements in Alabama for State Taxes
If you have employees or are responsible for any federal taxes on behalf of the business -- such as alcohol or tobacco tax -- you must apply for an employer identification number. An EIN is a unique number for the business which will be used on all federal tax filings. You may apply for an EIN online on the Internal Revenue Service website. You must also apply for an Alabama income tax withholding number from the Alabama Department of Revenue. As an employer, you must withhold state and federal taxes from employees' paychecks and report this amount to the state and the IRS.
Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."