• Small Business Resource Center, Montgomery Area Chamber of Commerce, Montgomery Chamber, MGMChamber, Montgomery Alabama
  • Entrepreneur's Toolkit - Start-Up Guidelines

  • Legal Structure

    Licenses and Permits

    Accounting and Record-keeping


    Legal Structure

    Once you decide to start a business, you must decide what type of business entity to set up. There are many legal and tax considerations that become complicated, and it is advised that you consult an
    attorney or accountant to help you determine the appropriate structure.

    There are five principle forms of business structures:

    1. Sole Proprietorship
    2. Partnership
    3. Limited Liability Company (LLC) or Limited Liability Partnership (LLP)
    4. Corporation
    5. Subchapter S Corporation

    The decision should be based on your specific circumstances, goals and needs. These structures, along with their advantages and disadvantages, are listed below.

    Sole Proprietorship

    Sole proprietorship is defined as a business owned and operated by one person. To establish a sole proprietorship, you obtain necessary licenses and begin operation. A sole proprietorship is an extension of the individual. Income is reported on the individual tax return using your social security number.


    • Ease of formation
    • Sole ownership of profits
    • One owner has control/decision-making power
    • Flexibility in day-to-day management
    • Relative freedom from government intervention


    • Unlimited liability. This extends to all of the proprietor’s assets including the home and car, but may be lessened by proper insurance coverage
    • Unstable business life. The business may terminated upon the death of the owner
    • Less available capital
    • Difficulty in obtaining long-term financing
    • Relatively limited viewpoint and experience


    The Uniform Partnership Act, adopted by many states, defines a partnership as “an association of two or more persons to carry on as co-owners of a business for profit.” Though not specifically required by the Act, written Articles of Partnership are customarily executed. These articles outline the contribution by the partners into the business (financial, material, or managerial) and generally delineate the roles of the partners in the business relationship. Some of the characteristics that distinguish a partnership from other forms of business organizations are the limited life of a partnership, unlimited liability of at least one partner, co-ownership of the assets, sharing of managerial duties, and sharing of the profits.

    The Service Corps of Retired Executives (SCORE), has developed an outline of considerations in forming a partnership at its website: www.score.org/content/partner-score.


    • Ease of formation
    • Direct rewards
    • Growth and performance facilitated
    • Flexibility in decision-making
    • Relative freedom from government control and special taxation


    • Unlimited liability of at least one partner
    • Unstable life-elimination of either partner constitutes automatic dissolution of the partnership
    • Difficulty in obtaining large sums of capital
    • Firm bound by the acts of one partner as agent
    • Difficulty of disposing of partnership interest

    Limited Liability Companies and Partnerships

    The LLC and LLP arose from the desire of business owners to adopt a business structure permitting them to operate like a traditional partnership. This distributes the income and income tax to the partners (reported on their individual income tax returns), but also protects them from personal liability for the business’ debts, as with the corporate business form. As a separate entity, it can acquire assets, incur liabilities and conduct business. As the name implies, however, it provides limited liability for the owners. The owners risk only their investment. Personal assets are not at risk. The
    Alabama Secretary of State’s office can help you with requirements:

    Business Services
    Alabama Secretary of State
    P.O. Box 5616
    Montgomery, AL 36103
    (334) 242-5324


    • Limited liability without limits on management participation
    • Flexible ownership and capital structure
    • No double taxation
    • Allocation of tax benefits among members


    • Initial cost to establish
    • Poor tax treatment of fringe benefits
    • Rules are still evolving


    The corporation is by far the most complex of the business structures. A corporation is a distinct legal entity. That is, it is separate from the individuals who own it. A corporation is formed by the authority
    of a state government. Corporations which do business in more than one state must comply with federal laws regarding interstate commerce as well as with the state laws, which may vary considerably. A corporation is comprised of three groups of people: shareholders, directors, and officers. The procedure ordinarily required to form a corporation begins with a subscription for capital stock, and a tentative organization created. Then, approval must be obtained from the Secretary of State in the state in which the corporation is to be formed. This approval is in the form of a charter for the corporation, stating the limitations of the particular enterprise.


    • Limitations of the stockholders’ liability to a fixed amount of investment
    • Ownership is readily transferable
    • Separate legal existence
    • Stability and relative permanence of existence
    • Relative ease of securing capital
    • Delegated authority
    • Ability to draw on expertise and skills of many


    • Activities are limited by charter and various laws
    • Minority stockholders may be exploited
    • Extensive government regulations and reports
    • Fewer financial incentives for the manager
    • Double taxation - income tax on corporate net income (profit) and on salaries and dividends

    Subchapter S Corporation

    The Subchapter S Corporation is a legal corporation that is afforded special tax treatment under Subchapter S of the Internal Revenue Code. Under state law, S Corporations retain the normal features of corporations, to include limited liability, but for federal tax purposes they are treated much like sole proprietorships and partnerships. The profits are taxed at the individual rather than corporate rate; hence, the stockholders report corporate income, loss, deductions, and credits on their individual tax returns. In most all other aspects, the S corporation operates in compliance with state and federal laws relating to corporations, just as a regular corporation.


    • Limited liability of stockholders
    • Ownership is readily transferable
    • Separate legal existence
    • Taxed similar to partnership. Profits pass through corporation un-taxed, but are taxed as individual stockholder income, loss, deductions and credits


    • Activities limited by charter and various laws
    • Extensive government regulations and reports​
    • Limits to the number of stockholders
    • S Corporation cannot own more than 80% of any other corporation
    • Stockholders must be individuals, not entities
    • Stockholders must be resident citizens
    • Only one class of stock may be issued
    • The law prohibits S incorporation for the sole purpose of obtaining limited liability status

    Procedures for Incorporation

    The following procedures apply to the formation of an Alabama (domestic) for–profit corporation under Title 10, Code of Alabama 1975, as last amended. The proposed name of the corporation must be reserved with the Corporate Section of the Office of the Secretary of State. If the proposed name is available, a Certificate of Name Reservation will be issued. Alabama law requires that the name contain the word ‘corporation’ or ‘incorporated’ or an abbreviation of such word. After receiving the Certificate of Name Reservation, the Articles of Incorporation may be filed. The necessary forms can be obtained and additional questions answered by contacting the Secretary of State’s office:

    Business Services
    Alabama Secretary of State
    P.O. Box 5616
    Montgomery, AL 36103
    (334) 242-5324


    Licenses & Permits

    When determining what licenses and permits are required for your specific business, it is essential to determine the federal, state, county and city requirements that must be met. You should obtained the information early in the research process to determine if a particular type of business is  allowable in the area you are considering. Every business is required to have a license to operate in Alabama, and there are varying rules, regulations and pricing for every type of business.

    Most every person, firm, company, corporation or association engaged in any business, vocation, occupation or profession must obtain a state license, as well as a county license. The State of Alabama has created a useful website outlining many state business requirements at www.alabama.gov. Title 40-12, Code of Alabama, 1975 covers state license requirements. Additionally, municipalities issue business licenses to do business within their limits. Authority of municipalities is covered in Title 11-51, Code of Alabama, 1975.

    The Alabama Department of Industrial Relations, Labor Market Information Division, maintains a website on the Alabama Comprehensive Labor Market Information System (ACLMIS) that provides detailed information for all Alabama Occupational Licenses. Go to www2.labor.alabama.gov/oes.

    The Alabama League of Municipalities provides a listing of the professions that municipal clerks must verify the possession of a state license before they may issue a local license. Go to www.alalm.org.

    Any questions concerning privilege license laws or store license laws should be directed to:

    Alabama Department of Revenue
    Sales, Use, and Business Tax Division
    50 North Ripley St.
    Montgomery, AL 36104
    (334) 353-7827

    Operating a Business in Montgomery County

    Your business may need a Montgomery County and/or State of Alabama business license. You can go to the Montgomery County Courthouse, 101 South Lawrence Street, Montgomery, to check on both of these licenses.

    Operating a Business in the City of Montgomery

    The Business License Office will be able to help you in regard to your specific business licensing needs.

    You apply for a license at the License & Revenue Division, 25 Washington Avenue, Montgomery. You can download the application at www.montgomeryal.gov.

    They will direct you for any additional requirements such as Building and Fire inspections.

    Although zoning regulations prohibit the operation of a business from a residence, in some situations the city does allow persons to use their home as a base of operations for answering the telephone and book keeping procedures. These types of licenses carry stipulations:

    1. No pedestrian traffic to residences for business purposes.
    2. No situation that could create a nuisance to neighbors.
    3. Street addresses cannot be listed in advertising. However, a home phone number can be used.

    Licensing dealing with minors, door-to-door solicitors and entertainment where children may congregate require a record check by the Police Department prior to the issuance of a license.

    If you want to apply for any alcoholic beverage licenses, you must begin the application process at the ABC License Enforcement Division Office located at 8413 Crossland Loop, Montgomery. Application is then carried to the Revenue Office.

    Accounting & Record-keeping

    There are obvious reasons for maintaining good records and books for your business. First and foremost, it’s the law. In addition, your banker or lender requires adequate and complete financial statements. Good records are also useful to you as the manager. They provide an overall summary of how your business is doing and detail specific items in your records to identify issues and opportunities. You must keep records to determine the tax liabilities of a business. The records must be permanent, accurate and complete, and they must clearly establish income, deductions, credits, employee information and anything else specified by federal, state and local regulations. When you start your business, establish the type and arrangement of books and records most suitable for your particular operation, keeping in mind applicable taxes and when they fall due.

    Accounting Methods

    There are two types of accounting systems commonly used for record-keeping purposes: cash basis and accrual basis. Which one is best for you depends on your sales volume, your legal structure, and whether or not you extend credit to your customers. In the long run, both accrual and cash methods produce the same results.

    Cash Basis

    You do your business and pay taxes according to your cash flow. In other words, revenue is reported when cash is received and an expense when cash is paid.

    Accrual Basis

    Under this method, income and expenses are charged to the period to which they should apply, regardless of whether money has been received. In accrual basis, it doesn’t matter when you receive or make actual payment. Income is reported when you bill. Expenses are deductible when you are billed, not when you pay. Under certain circumstances, the IRS
    requires you use the accrual method. The accrual method provides more information but is more involved and difficult than the cash method. For this reason, most individuals and many small businesses choose the cash method.


    When you develop a record-keeping system, keep in mind that it must be simple to use, easy to understand, reliable, accurate, consistent, and designed to provide information on a timely basis.
    There are four basic types of records your business will generate and you will need to track.

    Sales Records

    They include all income derived from the sale of products or the performance of services.

    Cash Receipts

    They account for revenue generated through cash sales and the collection of accounts receivable.

    Cash Disbursements

    Often referred to as operating expense records or accounts payable. All disbursements should be made by check so business expenses can be documented for tax purposes.

    Accounts Receivable

    These are sales stemming from the extension of credit. These records should be maintained on a monthly basis so you can age your receivables and determine how long your credit customers are taking to pay their bills.

    Again, if you do not have the necessary experience, it is recommended that you consider hiring a bookkeeper or CPA to help you develop your record-keeping system.

    A number of one-book record keeping systems are available. Some have instructions and forms designed for specific business segments, while others are for small business use in general. Trade associations, manufacturers and wholesalers offer specially-designed record keeping systems to meet the general needs of a variety of retail and service establishments.

    There are several copyrighted systems providing simplified records. These systems cover the basic records with complete instructions for their use. Free basic templates can be downloaded from score.org.

    In order for a record keeping system to be useful, it must be simple to use, easy to understand, reliable, accurate, consistent, and designed to provide information on a timely basis. To keep effective records, you must be able to:

    • Identify earnings for self-employment tax
    • Identify the source of a receipt
    • Keep track of all deductible expenses
    • Figure depreciation allowance
    • Take advantage of capital gain and loss laws
    • Support items on your tax returns

    Accounting Systems

    Computerized accounting is the way most accountants do books each month. If you want to do your own books, you should consider an accounting program for your record keeping. There are several good accounting programs available at office supply retailers. Accounting systems range from simple and inexpensive to powerful and costly. Some of the available options include the one-write system, a ledger-less system for accounts receivable and accounts payable, standard ledgers and journals, prepackaged services provided by banks and service bureaus, bookkeeping services, and accountants. With this wide variety of options, it is important to choose a system that you can understand and feel comfortable using.

    The accounting system you choose should meet the needs of your business situation and, at the minimum, meet the following objectives:

    • The system should yield an accurate and precise picture of the operating results
    • The records should provide a convenient basis for comparing current data with previous year’s operating results and budgetary goals
    • The financial data should be presented in a format that is useful to prospective creditors, bankers, auditors and management
    • The accounting records should reflect losses such as theft and bad debt
    • The accounting process should include compiling and filing reports and tax returns
    • The accounting records should be able to substantiate the value of fixed assets for insurance claims, in the event of a loss
    • The United States Securities & Exchange Commission requires most publicly held corporations to file certain annual and interim quarterly reports


    Insurance for some business owners is an overwhelming task. However, if used correctly, insurance can contribute to the overall success of your business by reducing the uncertainties. It can also reduce employee turnover, improve your credit at the bank, make it easier to sell to customers on favorable terms and help keep your business running if a covered incident interrupts your normal business operations.

    You should purchase a number of basic types of insurance. If you are operating a business from home, your household insurance probably will probably not cover your business venture. A separate policy or upgrading your current house insurance to cover the business is a necessary cost of doing business. The importance of good insurance management is too important to overlook. It is essential that you discuss your insurance needs with your agent.

    You should purchase a number of basic types of insurance. If you are operating a business from home, your household insurance probably will probably not cover your business venture. A separate policy or upgrading your current house insurance to cover the business is a necessary cost of doing business. The importance of good insurance management is too important to overlook. It is essential that you discuss your insurance needs with your agent.

    Whether you deal with an independent agent, insurance broker, or work directly with an insurance company, be certain you’ve done comparison-shopping before you sign up. Depending on the type of insurance you are purchasing, various factors will affect your insurance premium. The lower the premium, the higher the deductible; the higher the premium, the lower the deductible. Some firms have better track records in paying dividends and claims. Ask your peers, associates, or even trade associations in your state for insurers with a good reputation.

    Insurance Checklist

    • Fire Insurance
    • Liability Insurance
    • Automobile Insurance
    • Workers Compensation
    • Business Interruption Insurance
    • Crime Insurance
    • Glass Insurance
    • Rent Insurance
    • Employee Benefit Coverage
    • Aviation Insurance
    • Group Life Insurance
    • Business Life Insurance
    • Group Health Insurance
    • Disability Insurance
    • Retirement Insurance
    • Key Man Insurance
    • Marine and/or Inland Marine
    • Boiler and Machinery
    • Flood Insurance

    Insurance matters are addressed in two SBA publications: MP-20- Insurance Options for Business Continuation Planning, and MP-28-Small Business Insurance and Risk Management Guide. Both are available online at the SBA Library site.

  • Montgomery Area Chamber of Commerce
    600 S. Court St, P.O. Box 79
    Montgomery, Alabama 36101
    Tel: 334.834.5200   Fax: 334.265.4745

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