SMALL BUSINESS RESOURCES
Building something great is hard work. There are so many questions about what you need, where to go, and how to do it. What's harder is that so much is entirely dependent on what kind of business you have. We've put together a one-stop shop for what you need to get going if you're a business operating in Birmingham City. You'll find some are industry specific, and some are based on the city or county you are operating in. Some are required for everyone in the state. Additionally, sometimes documents are known by different names…we’ll clear all this up below. If you are a business operating outside of the City of Birmingham, follow the framework below using your local municipality. Being an entrepreneur can be stressful. Don't let it be lonely. We’re here to help.
BUSINESS VS. HOBBY
There is often a lot of confusion about what is a “business” and what is a “hobby.” It isn’t a simple “yes-no” question. There’s some art to the process. As a creative, we know you got this! What is your heart telling you? Do you want to quit your day job and pursue this venture full-time? Do you want it to grow so you can hire people? Are you willing to change, learn, and experience some failure along the way? What kind of legacy do you want to leave?
We know it’s scary. You can be scared. Most of us are when we start our businesses! The question isn’t “Are you scared?” The question is, “Do you have the courage to dream, try, fail, and try again?” If so, you’re interested in starting a business! If you’re not sure if you want to do business or if your business activities will be of value, check out CO.STARTERS. So how do the regulators define “a business?” We’ll start with the IRS’s guidance by answering these questions:
(Examples of “businesslike manner” include having regular hours, separate banking, a website, insurance, etc.)
- Yes – Business
- No – Hobby
You don’t need to be an accountant, but having an understanding of the finances is important for you to understand the profitability of your business.
- Yes – Business
- No – Hobby
If you’re not interested in earning a profit (revenue – expenses = profit), you are not doing business. Remember that you can do good while doing business. However, if profit (i.e., paying yourself) is not one of your major motivations, you’re probably running a hobby.
- Yes – Business
- No – Hobby
- Yes – Business
- No – Hobby
Keep in mind that if circumstances change (like technology or the economy) and you are trying to adapt, this counts towards being a business.
- Yes – Business
- No – Hobby
Basically, if you see something that’s not working, do you try to improve and change or do you hope things will get better on their own? (Hint – if you’re reading through these resources to learn how to do business, you are probably operating a business!)
- Yes – Business
- No – Hobby
This relates to the previous question and targets later-stage entrepreneurs with experience. If this is your first time, think about why you believe you may be successful. Do you have a boatload of experience in your craft and friends always asking to buy your products or teach them how?
- Yes – Business
- No – Hobby
This is related to #7 and targets later-stage entrepreneurs who have experience. If this is your first time, think about why you believe you may be successful. Do you have a lot of experience in your craft, and are friends always asking to buy your products or teach them how to do something?
- Yes – Business
- No – Hobby
- Yes – Business
- No – Hobby
If you have more yeses than nos, you’re operating a business. In going from a hobby to a business, consider timing. One of the most common paths to starting a business is to first start as a hobby. If you’re in this boat, you’re in good company! Have no fear; you will not be fined for operating a hobby without a business license. You should test out your craft and see if customers may be interested in purchasing from you.
However, you will be fined if you’re operating a business without a business license. So, as you start to formalize your hours, specialize in your craft, professionalize your operations, and get more requests for your goods and services beyond your friends and family, then you will need business licenses… before operating your business. Keep in mind that the departments that regulate business licenses are there to generate revenue for the government. They have the incentive to define “business” very widely.
LEGAL AND TAX STRUCTURES
It’s worth noting that the government does not mandate any particular legal form for your business, regardless of what type of business you operate. You could be a painter (your activity) and operate a sole proprietorship, LLC, corporation, nonprofit, or partnership (your tax & legal structure). This T that you get to decide on the right legal structure (and, to some extent, tax structure) to fit your business operations. The explanations below are for educational purposes only and do not constitute legal, financial, or tax advice.
A single person owns this type of legal structure for a business. The business and the person are legally indistinguishable (there is no separate legal or tax structure). You may also hear terms like a sole prop, 1099, freelancer, or contractor. In general, these terms all refer to the same thing.
Pros: It is easy and relatively inexpensive to set up and dissolve. Initial licenses will cost you somewhere around $200, if you DIY. (Regulated industries, like food businesses, require additional licenses.)
Cons: The biggest drawback of the Sole Prop structure is the lack of legal protection. The business owner takes on all the risks and responsibilities of the business. You can still use contracts and insurance to protect yourself but it’s still the riskiest legal entity. Additionally, it is a more difficult structure to grow because it limits your options to obtain funding. Finally, there are very few options to ethically & legally lower taxes.
An LLC (“limited liability company”) is a simple and flexible legal entity that provides the owner(s) with a legal shield (“corporate veil”) that mitigates some of doing business. For example, let’s say Katherine’s Kar Wash LLC is owned by Katherine. If someone slips on soap and breaks their arm at their car wash, as an LLC, the client could sue the LLC and potentially gain access to the business assets ($), but Katherine’s personal assets (house, home, personal savings), would not be up for grabs. Keep in mind that this legal shield isn’t impenetrable, and steps do need to be taken to keep the business and personal affairs clearly separate. Keep in mind that an LLC is a legal entity (not a tax entity) separate from the owner(s) (“Members”) of the business.
Pros: Easy and moderately inexpensive to set up. Initial licenses and taxes will cost you around $500 if you DIY. (Regulated industries, like food businesses, require additional licenses.) This legal structure makes it easier to get funding. It is also a signal to suppliers/vendors and customers that you’re a stable business entity. You can have business partners with this structure, and you may sell the business. Finally, because this is a legal structure, not a tax structure, you will have more flexibility in selecting your tax structure.
Cons: The major drawbacks of this type of structure are 1) The “corporate veil” isn’t bulletproof. 2) You have to pay to shut (“dissolve”) the business. 3) The initial licenses are more expensive than a Sole Prop.
A partnership is both a legal and tax structure of a business. In this type of structure, there are two or more individuals or entities (yes, businesses can own other businesses) agree to share the profits and losses of a business venture. There are a variety of reasons to form a partnership, including to pool resources, to share expertise, or to undertake a specific project or activity. In a partnership, each partner typically contributes capital, labor, or both and, as a result, shares in the profits and losses of the business in proportion to their ownership interest. Partnerships can be structured in different ways, including general, limited, and limited liability partnerships, each with its own legal requirements and tax implications.
Pros: Depending on the type of partnership formed, you may be able to limit some or all of the risk exposure to the partners and set expectations for participation in the business (see the SOS website for the types available in Alabama). Partnerships are common for law practices and accounting practices where there may be many owners. In these cases, there may be a tax benefit to forming a partnership rather than an LLC. Speak to an accountant before selecting any legal entity for tax purposes.
Cons: The filing fees to create a partnership are the same as creating an LLC. If forming a general partnership, you will pay the same amount for the initial licenses and taxes, but you will not receive the same legal protection. Additionally, it is highly recommended that any business operating with two or more owners seek legal advice on creating an agreement between the owners. This will add around $500 to the startup costs.
An S-Corporation, or S-Corp, is a tax designation for LLCs, not a legal structure. This tax structure allows the company to pass the company’s income, deductions, and credits through to the shareholders or members, who report these amounts on their individual tax returns. This tax structure avoids what is considered ‘double taxation’ of a corporation where the owners pay income taxes on their earnings and the business pays income taxes on the profits. It may also offer a lower tax rate than LLCs taxed as a sole prop or partnership because LLCs incur self-employment taxes on all profits.
To qualify for S-Corp status, the company must meet certain requirements, such as having no more than 100 shareholders and only one class of stock. S-Corps are typically used by small to medium-sized businesses and are popular for their tax advantages, as well as their liability protection for shareholders. Additionally, S-Corps allow for flexibility in management and ownership, as well as the ability to finance the business through the sale of stock.
Pros: This tax structure can provide a tax advantage if your business is generating over ~$70,000 per year. There is no rule or law specifying the income threshold, so talk to your accountant to decide when is right for your business.
Cons: The biggest barrier to forming an S-Corp is that the business owner must pay themselves a salary. If you cannot afford to pay yourself a reasonable salary (as determined by the government), you may end up incurring additional transaction, accounting, and legal expenses under this business structure. To understand what the government considers reasonable, look for an equivalent position in the Bureau of Labor Statistics wage data.
A corporation is a type of legal & tax structure that is created under the laws of a particular state or country to conduct business activities. A corporation is considered a separate legal entity from its owners or shareholders, which means that it has its own rights and liabilities. The owners of a corporation are called shareholders, and they own shares of the company’s stock. The corporation is managed by a board of directors who are elected by the shareholders. The board of directors appoints officers (CEO, CFO, COO, etc.) to run the day-to-day operations of the corporation.
The legal and regulatory requirements include filing annual reports, holding shareholder meetings, and maintaining accurate financial records. (Additional paperwork and meetings = additional administrative expenses.) Failure to comply with these requirements can result in legal penalties or the loss of the corporation’s legal status.
Pros: Owners are shielded from liability (there are exceptions). Corporations are preferred for high-growth and tech startups because they allow an unlimited number of shares to be sold. This also means that this legal structure has the widest variety of funding options.
Cons: This is by far the most administratively expensive legal structure to create and manage. Additionally, the shareholders are taxed on any income received as dividends, the owners are taxed on their income from the company, and the company is taxed on profits.
REGISTER YOUR BUSINESSES
You will need to acquire various business licenses before you can legally operate your business. Below you’ll find each step in the recommended order. There are many things to consider before registering your business, so take time to draft up your thoughts about your business name, products and services, and business structure before getting started with the legal aspects. The “Time to obtain” estimates how long it will take you to complete the registration process online with all the information on hand.
WHO NEEDS THIS: LLCs, Corporations, Partnerships
COST: ~$30
HOW OFTEN: 1 time fee (option to renew/extend)
TIME TO OBTAIN: 15 minutes
WHERE TO FILE: Alabama-based businesses online filing | Alabama-based businesses filing by mail
The first step in forming a separate legal entity is to reserve the business name. Your business name can be reserved online for ~$30 or you can mail in the paper form (~$25). The process only takes a few minutes online but you will need to know what type of business you’re forming first – an LLC, Corporation, Partnership, etc. In Alabama, businesses using a “fictitious name,” “Doing Business As (DBA),” or “Trade Name” are not required to register these names separately from the legal name of the business. Once filed, you can print and save your Name Reservation certificate. Your Name Reservation will be good for 1 year. Once you create your business, you will not need to continue your name reservation. (Just like if you make a reservation at a restaurant, you will not need the reservation after you go there to eat!)
Your business name can be anything you want, as long as it is available. Before you reserve your name, make sure the name is available to register here. Keep in mind that some names are easier to register and protect than others. You should also check to make sure the domain name (URL) and social media handles are available. Also think about any special characters you may want to use. Some government systems, like the IRS cannot register most special characters. This may cause a headache down the road. More information here. A quick way to check how many other folks might be using the same or similar business name is a simple Google search. Type your proposed business name in and see what comes up. Could people get confused between you and other businesses or people? If so, try a new name.
WHO NEEDS THIS: LLCs, Corporations, Partnerships
COST: ~$200
HOW OFTEN: 1-time registration fee (however, must file & pay to dissolve business)
TIME TO OBTAIN: 30 minutes
HOW TO GET HELP: Elaine Swearengin | Secretary of State Business Services Division Director
334-242-7221
Elaine.Swearengin@sos.alabama.gov
WHERE TO FILE: Alabama-based businesses online filing | Alabama-based businesses filing by mail
A Certificate of Formation (sometimes called Articles of Incorporation or Articles of Formation) is like the birth certificate of your business: it designates your business as a separate business entity. Not all business entities are required to file Certificates of Formation – Sole Proprietorships and Partnerships are not required to obtain Certificates of Formation, although Partnerships are required to register with the Secretary of State. You will need your Name Reservation to complete this process. While the formation is a one-time expense, you will need to file additional paperwork to “dissolve” or close your business.
Every business is required to have a designated point of contact. This point of contact is called the “Registered Agent.” The Registered Agent can be you or someone you trust, like a lawyer or accountant. You can use your home address or an office address. The name and address of the Registered Agent will be public information (see example here).
The process of filing for your Certificate of Formation can be done online in a few minutes. Here are things to keep in mind as you file:
- You can file your Name Reservation and Certificate of Formation via a single online portal.
- You can be your own registered agent
- You are probably not forming a “professional” or “series” organization
- You will need to include a physical and mailing address
- You will need to attach a copy of your name reservation
- The fee is $20
- Once you register your business online, you can download and print the Certificate of Formation.
WHO NEEDS THIS: Who needs this: LLCs, Corporations, Partnerships, Sole Proprietors, and more
COST: $0
HOW OFTEN: 1 per business
TIME TO APPLY & OBTAIN: 15 minutes
WHERE TO FILE: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
Having an EIN is a simple and free way to help separate your business from your personal activities and keep your social security number secure. If your certificate of formation is like a birth certificate for your business, the EIN is your business’s social security number. As a sole proprietorship, you are not required to obtain an EIN, but it is highly recommended. Some banks may require you to obtain an EIN before you can open a business bank account.
To get your EIN you’ll need the following:
- A PDF reader like Adobe or Preview
- The legal name of the business (EXACTLY as it is listed on your Certificate of Formation or birth certificate for Sole Proprietorships)
- Trade Name, DBA, or Fictitious Name if different from legal name (e.g. if you are a sole prop and your name is Tanisha Smith, you would put Tanisha Smith as the legal name for the business and Tanisha’s Tasty Treats & Cakes as the DBA or Trade Name)
- Mailing address
- Street address (no PO Boxes)
- Your social security number
- Number of owners (“members”) for your business
- Date the business started
- Number of employees you’re planning on hiring in the next 12 months (0 if none)
- Type of business activity (construction, real estate, retail, wholesale, accommodation & food service, other – independent artists should indicate “Other” and write in “Independent Artist”)
WHO NEEDS THIS: Sole proprietors, LLCs, Corporations, Partnerships, Non-Profits
COST: $80+
HOW OFTEN: Once a year (October – September)
TIME TO APPLY: 30 minutes
TIME TO OBTAIN: 6 weeks
HOW TO GET HELP: (205) 731-2965
WHERE TO APPLY: https://www.jccal.org/Sites/Jefferson_County/AppData/DocLib/Main/ApplicationforTaxorLicenseNumber.pdf
The county administers several licenses, including the state’s Privilege License and county business licenses. The same form can be used to apply for both. Read more about them here. These licenses are required to operate a business in Jefferson County. If you live in the Shelby County portion of Birmingham, call to check if you are required to obtain a county license for your business: Shelby County Business Revenue Supervisor (205) 670-6520.
County and state licenses are where the line between “taxes” and “licenses” gets rather blurry. The County Revenue Department is in charge of collecting both taxes and issuing licenses. Additionally, the county license office issues both county business licenses and state business licenses. The total license fee is dependent on your business activities and expected gross revenue. The license is required to be renewed annually.
The County license office will accept walk-in/hand-delivered applications and mailed-in applications. They do not accept email applications. The turnaround time for emailed applications can be as long as 4-6 weeks. Walk-in applications are serviced immediately.
Here are a few things to keep in mind before applying for a county license:
- While most of Birmingham is in Jefferson County, a small portion is in Shelby County. Each county has different requirements, deadlines, forms, and fees. Check with your county before applying for a county license.
- Jefferson County’s business license year ends on September 30. You are required to renew your license starting October 1. Business licenses are only prorated for 6 months. So, if you’re thinking about starting a business in September, ask yourself if you expect to take advantage of holiday sales. If not, wait until the new year.
- Do your best in estimating your gross revenue (i.e. sales) for the year.
Here is the address and contact information:
Jefferson County
Business License Office
Department of Revenue
A-100 Courthouse Annex
716 Richard Arrington Blvd N
Birmingham, AL 35203
(205) 735-2965
WHO NEEDS THIS: Sole proprietors, LLCs, Corporations, Partnerships, Non-Profits
COST: $80+
HOW OFTEN: Once a year (October – September)
TIME TO APPLY: 30 minutes
TIME TO OBTAIN: 6 weeks
WHERE TO APPLY: https://birmingham.bizlicenseonline.com/account/signup
City business licenses, similar to county licenses, are required prior to doing business in Birmingham. The easiest way to apply for a license is through an online application. However, you can also apply in person using this paper application. The business license application process and revenue collection is managed by Avenu Insights, a third party contracted by the City of Birmingham. For technical assistance with Avenu’s website or portal, contact (877) 899-BHAM (2426) or BhamTaxpayerSupport@avenuinsights.com. For questions about how to fill in the application, fees, or other application-related questions, contact the City of Birmingham’s Tax & License Division at 205- 254-2198. Due dates, fees, and other helpful information can be found in General Information for New Businesses.
ADDITIONAL LICENSES AND PERMITS
You will need to acquire a variety of business licenses before you can legally operate your business. You’ll need to get a federal license or permit if your business activities are regulated by a federal agency.
Check to see if any of your business activities are listed here, and then check with the right federal agency to see how to apply. Requirements and fees depend on your business activity and the agency issuing the license or permit. It’s best to check with the issuing agency for details on the business license cost.
In addition, the municipality where you are operating may have specific operating licenses.
Whenever a food establishment is constructed or remodeled and/or an existing structure is converted to use as a food establishment, properly prepared plans must be submitted to the Department of Health for review and approval prior to beginning construction or remodeling.
WHERE TO APPLY: https://www.birminghamal.gov/wp-content/uploads/2017/08/Alcoholic-Beverage-Licences.pdf
Applications for Alcoholic Beverage licenses are taken by appointment only at the office of the Tax and License Administration (Revenue) Division. Your application for an alcoholic beverage license will be processed by the Tax and License Administration (Revenue) Division and reviewed for approval/denial by the City Council, its representatives, and agencies. This process takes approximately 6-8 weeks.
A copy of your application will be forwarded to the Administrative Vice Section of the City of Birmingham Police Department for investigation. A report of their findings is forwarded to the Public Safety Committee of the City Council.
The Public Safety Committee meets on the second Tuesday of each month. The committee will review the application and recommend approval/denial to the City Council. Applicants are required to attend this meeting. The City Council office will notify you by mail of the date and time scheduled for the review of your application. Read more information
Birmingham requires specific permits and licenses depending on your type of business or construction. All of the applications can be found on this site.
TAXES
Small businesses typically have to pay several types of taxes. The specific taxes that a business must pay will depend on its location and the type of business entity (i.e. sole proprietorship, partnership, LLC, corporation, S-corp.). Here are some common types of taxes that small businesses may be required to pay:
- Business Privilege Tax
- Income tax
- Self-employment tax
- Sales tax
- Employment taxes
- Property tax
It’s important for small business owners to consult with a tax professional or accountant to determine which taxes apply to their specific situation and to ensure that they are complying with all tax laws and regulations.
WHO NEEDS THIS: LLCs, Corporations, Partnerships
COST: $50+
TIME TO APPLY: 3 weeks to receive log-in information; 1 hour to apply
HOW OFTEN: 1 per year
WHERE TO APPLY: Alabama Department of Revenue
There is often confusion between the Business Privilege License and the Business Privilege Tax. The Business Privilege License is issued by the state and collected by the county. Jefferson County includes the fee for your Business Privilege License in the total you will pay for your county business license. For more information, see the section on County License.
The Business Privilege Tax is administered by the Department of Revenue. It is required. Shortly after you register your business with the Secretary of State to obtain your Certificate of Formation, you’ll receive two letters from the Alabama Department of Revenue providing you with information about the required Business Privilege Tax and a username/pin to set up your account. You’ll register in MyAlabamaTaxes. This is the best place to file your tax returns and pay your business privilege tax. To set up an account, follow these steps or follow the prompts to set up your account and pay your business privilege tax (BPT). If you have questions, contact the Taxpayer Service Center at 205-733-2740 and select the option for “income taxes.”
WHO NEEDS THIS: LLCs, Corporations, Partnerships
COST: varies based on your household income and business profits
WHEN TO FILE: April, June, September, January
HOW OFTEN: Quarterly or Annually
WHERE TO FILE: Alabama Department of Revenue and IRS
This tax is based on the net income (net profit) of the business and is typically paid annually or quarterly. Learn about quarterly estimated taxes here. Learn about the income tax returns & forms here. Income taxes typically include Self-Employment taxes (see below) and taxes on the profit earned in the business.
WHO NEEDS THIS: Sole Props, LLCs, Partnerships
COST: varies based on your household income and business profits
TIME TO FILE: April, June, September, January
HOW OFTEN: Quarterly or Annually
WHERE TO FILE: Alabama Department of Revenue and IRS
Self-Employment taxes (SE taxes) is a Social Security and Medicare tax. If you share in the profits of these types of businesses, you will most likely owe this tax. The tax rate is 15.3% of the business profit. According to the IRS, “You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructions.” Learn more about how to calculate your self-employment tax here.
Sales taxes cause a lot of stress. You will get the hang of it, we promise. A few things to note:
- All legal forms of businesses (sole prop, LLC, corporation, partnership) must pay sales taxes. The easiest way to pay them is through MyAlabamaTaxes.
- Sales taxes are due at the city, county, and state levels of government.
- The city or county you owe the taxes to is determined by where you have “nexus” – a fancy tax term meaning roughly “having a substantial presence.” There are a lot of rules around this, so when in doubt, talk to your tax professional. The Alabama Department of Revenue knows it is confusing for people, so they have instructional videos and professionals available to assist you with getting started.
- Sales taxes vary by location and by the types of products you sell. In general, creative businesses sell products that fall under the “General” category. For this category, the state tax rate is 4%, Jefferson County is 1%, and Birmingham is 4% for a total of 10% on goods sold in Birmingham. Check out your receipt next time you go grocery shopping.
- If you sell through a marketplace like Etsy or Amazon, these companies can collect the sales taxes directly from your customers and pay the sales taxes directly to the state. If you sell through ONLY these types of marketplaces, you do not need to set up a sales tax account in MyAlabamaTaxes.
WHO NEEDS THIS: Sole Props, LLCs, Partnerships, corporations
COST: Rates vary starting at 7.65% of wages*
WHEN TO FILE: 15th day following the wage payment
HOW OFTEN: Monthly
WHERE TO FILE: Via a payroll company (ADP, Gusto, banks)
If a small business has employees, it must pay certain taxes related to their employment, such as Social Security and Medicare taxes, unemployment taxes, and workers’ compensation insurance. The rules around when and how much to pay depend on several factors including how many hours the employee has worked. Do not try to calculate these on your own. They are complex, and the penalties for underpaying or paying late are severe.
WHO DOES THIS: Sole Props, LLCs, Partnerships, corporations
COST: varies depending on the appraised value of the property
WHEN TO FILE: October
HOW OFTEN: Annually
WHERE TO FILE: OPPAL
If a small business owns real estate or personal property (e.g., equipment, inventory), it may be required to pay property taxes on those assets. According to the Alabama Department of Revenue, “The type of business, type of equipment, acquisition year, and acquisition date are all used in the valuation of personal property. For example, computer equipment depreciates more quickly than pieces of office furniture.”