How to Start an S-Corporation in Alabama (2024 Guide)

Start an S-Corporation in Alabama

If you want to start an LLC in Alabama, there are things that you should consider. Alabama is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Alabama, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Alabama if qualified for the limitations and requirements.

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How to Form an S-Corporation in Alabama?

To create S-Corp in Alabama, you must follow the below guidelines that include forming a business name, hiring a Resident Agent, filing your Certificate of Formation, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Alabama

After you have decided on the idea to start an S-Corp in Alabama, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Alabama Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Alabama.
  • Limit of restricted words that need a license in Alabama
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Resident Agent

The next step in starting an S-corp in Alabama is hiring a Resident Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Resident Agent in Alabama.

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Step 3: File For Certificate of Formation

The Certificate of Formation is an important document to start your limited liability company (LLC). Alabama Certificate of Formation is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Certificate of Formation to be filed in AL Department of Revenue, you need to pay a filing fee of $200. In Alabama, the filing fee of forming an LLC is $200 (by mail and $208 online).

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Step 4: Creating an Operating Agreement

After you have filed your Certificate of Formation, the next step is to create an operating agreement in Alabama. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Alabama can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Certificate of Formation to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Alabama, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Alabama, including:

  1. Filing Fees: When forming a corporation in Alabama, you must file Certificate of Incorporation with the Alabama Secretary of State and pay a filing fee of $200 for filing by mail.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Alabama are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Alabama General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Alabama are subject to the annual franchise tax, which can financially burden some businesses.

In an Alabama S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Alabama franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-corporation?
An S-corporation is a type of corporation that meets certain requirements and elects to be taxed under subchapter S of the Internal Revenue Code.
What are the benefits of forming an S-corporation in Alabama?
S-corporations provide pass-through taxation, limited liability protection, and simplified governance structures.
What are the requirements to form an S-corporation in Alabama?
In Alabama, the requirements to form an S-corporation are similar to those of a traditional corporation, with the addition of filing an election form with the IRS to be taxed as an S-corporation.
Can I form an S-corporation if I am a non-resident of Alabama?
Yes, you can form an S-corporation in Alabama even if you are a non-resident. However, you will need to appoint a registered agent who lives in Alabama.
How much does it cost to form an S-corporation in Alabama?
The cost to form an S-corporation in Alabama varies depending on several factors, including filing fees, legal fees, and other expenses.
How long does it take to form an S-corporation in Alabama?
It typically takes about 7-10 business days to form an S-corporation in Alabama, but it could take longer depending on the complexity of your specific situation.
What are the tax implications of forming an S-corporation in Alabama?
S-corporations in Alabama are not subject to federal income tax, but their shareholders will still need to report and pay taxes on their share of the income on their personal tax returns. Alabama, however, does have a state S-corporation tax.
How many shareholders can an S-corporation have in Alabama?
In Alabama, an S-corporation can have up to 100 shareholders.
Can an S-corporation in Alabama own other businesses?
Yes, an S-corporation in Alabama can own other businesses and assets.
Can an S-corporation in Alabama have international shareholders?
Yes, an S-corporation in Alabama can have international shareholders, but additional rules and regulations may apply.
What is a registered agent in Alabama?
A registered agent in Alabama is someone who acts as a point of contact for your S-corporation. They must have a physical address in the state and be available during regular business hours to receive official documents and other mail.
How do I choose a registered agent for my S-corporation in Alabama?
You can choose a registered agent for your S-corporation in Alabama by hiring a professional service that provides this type of service or by appointing someone you know and trust who has a physical address in the state.
What is a Business Privilege Tax in Alabama?
A Business Privilege Tax in Alabama is a tax on the privilege of doing business in the state. Alabama passed a legislation in 2021 which introduced an annual lump sum business privilege annual reporting fee which replaces the incremental LLC tax on earnings/profits in proportion to active or reserved shares/interest in an LLC.
What is a Certificate of Formation in Alabama?
A Certificate of Formation in Alabama is a legal document that you must file with the Alabama Secretary of State’s office to formally set up your S-corporation in the state.
Do S-corporations in Alabama need to file an Annual Report?
Yes, S-corporations in Alabama are required to submit an annual report online every year by April 15th to remain active.
What are the record-keeping requirements for an S-corporation in Alabama?
Alabama S-corporations must maintain records of all shareholder activity, including meetings, votes, and actions taken by the board of directors.
What happens if an S-corporation in Alabama loses its status?
If an S-corporation in Alabama loses its status, it will be subjected to double taxation, meaning it will have to pay federal income tax as a traditional corporation and will also have to distribute profits to shareholders.
Can an S-corporation in Alabama be converted to a different business entity type?
Yes, an S-corporation in Alabama can be converted to a different business entity type, such as a C-corporation or LLC, with proper planning and guidance from a legal or financial professional.
How can I protect my personal assets as a shareholder of an S-corporation in Alabama?
You can protect your personal assets as a shareholder of an S-corporation in Alabama by using contracts and agreements; insuring your business and your personal assets; and using separate bank accounts and bookkeeping techniques.
Can an S-corporation in Alabama distribute profits to shareholders?
Yes, S-corporations in Alabama can distribute profits to shareholders through regular dividends or a profit-sharing plan.
How much liability protection does an S-corporation in Alabama provide?
S-corporations in Alabama provide limited liability protection, which means that the company’s debts and obligations are not the personal responsibility of its shareholders or officers.
What is the best structure for my business in Alabama?
The best structure for your business in Alabama depends on several factors, including the size of your business, its profits, its potential creditors and liabilities, its goals for the future, and other considerations.
What documents will I need to form an S-corporation in Alabama?
You will need to file a Certificate of Formation, Articles of Incorporation, and other forms and documents as required by state and federal regulators.
Who can act as an incorporator for an S-corporation in Alabama?
Anyone can act as an incorporator for an S-corporation in Alabama, as long as they meet the requirements of the state’s probate court.
Does Alabama allow one-person S-corporations?
Yes, Alabama allows one-person S-corporations.
How does an S-corporation in Alabama differ from a traditional corporation?
An S-corporation in Alabama is taxed differently from a traditional corporation and provides limited liability protection, as well as other benefits.
Can I change the accounting method for my S-corporation in Alabama?
Yes, you can change the accounting method for your S-corporation in Alabama. However, doing so may require you to get approval from state and federal regulators and may impact your tax liability.
How do I dissolve my S-corporation in Alabama?
To dissolve an S-corporation in Alabama, you must file Articles of Dissolution with the state and take other appropriate actions as required by federal and state law.
How do I form an S-corporation in Alabama?
To form an S-corporation in Alabama, you must file articles of incorporation or formation with the Secretary of State and file an S-election with the IRS.
What is the deadline to file for an S-corporation in Alabama?
You should file for an S-corporation in Alabama within 75 days of forming the corporation or within 75 days of the start of the tax year.
What is the minimum number of shareholders required for an S-corporation in Alabama?
Alabama requires at least one shareholder for an S-corporation to be formed.
Can an S-corporation in Alabama have more than 100 shareholders?
No, an S-corporation in Alabama cannot have more than 100 shareholders.
Are there any residency requirements for shareholders of an S-corporation in Alabama?
No, there is no residency requirement for shareholders of an S-corporation in Alabama.
Can an S-corporation in Alabama issue stock?
Yes, an S-corporation in Alabama can issue stock.
Does Alabama require an annual report to be filed for S-corporations?
No, Alabama does not require an annual report to be filed for S-corporations.
Can an S-corporation in Alabama elect subchapter S status for federal tax purposes?
Yes, an S-corporation in Alabama can elect subchapter S status for federal tax purposes.
What are the benefits of being an S-corporation in Alabama?
The benefits of being an S-corporation in Alabama include pass-through taxation, less paperwork, limited liability protection, and potential tax savings.
Are S-corporation shareholders liable for the company’s debts in Alabama?
S-corporation shareholders in Alabama cannot be held personally liable for the company’s debts.
Can an S-corporation convert to a C-corporation in Alabama?
Yes, an S-corporation in Alabama can convert to a C-corporation.
What is the tax rate for S-corporations in Alabama?
Alabama S-corporations are taxed at a rate of 6.5%.
Do S-corporations in Alabama have to pay city tax?
S-corporations in Alabama may have to pay city tax depending on the location of the business.
Can S-corporations in Alabama deduct health insurance premiums?
Yes, S-corporations in Alabama can deduct health insurance premiums for employees.
Are S-corporations in Alabama subject to unemployment tax?
Yes, S-corporations in Alabama are subject to unemployment tax.
Can S-corporations in Alabama have a fiscal year-end?
Yes, S-corporations in Alabama can have a fiscal year-end.
Can an S-corporation be owned by an LLC in Alabama?
Yes, an LLC can own an S-corporation in Alabama.
What is the cost to file S-corporation documents in Alabama?
The cost to file S-corporation documents in Alabama varies by state.
Can an S-corporation lease property to a shareholder in Alabama?
S-corporations in Alabama can lease property to shareholders if they do so at fair market value.
Can a non-profit organization be an S-corporation in Alabama?
No, non-profit organizations cannot be S-corporations in Alabama.
Are shareholders of an S-corporation required to take salaries in Alabama?
Yes, shareholders of an S-corporation in Alabama are required to take a reasonable salary.
Can a member of an S-corporation in Alabama also be an employee of the company?
Yes, a member of an S-corporation in Alabama can also be an employee of the company.
Are there any benefits to forming an S-corporation over an LLC for tax purposes in Alabama?
S-corporations have potential tax advantages over LLCs in Alabama as LLCs are taxed as a pass-through entity under federal law and are subject to Alabama’s business privilege tax.
Can an S-corporation issue fractional shares in Alabama?
No, S-corporations cannot issue fractional shares in Alabama.
Do S-corporations in Alabama pay taxes on retained earnings?
No, S-corporations in Alabama do not pay taxes on retained earnings.
What are the drawbacks of forming an S-corporation in Alabama?
The drawbacks of forming an S-corporation in Alabama are mostly related to the eligibility criteria, which may impact your ability to raise financing and the number of shareholders allowed, among others.

Also Read

Why You Should Start Alabama S Corp

One key reason to consider starting an Alabama S Corp is the tax benefits it can provide. S Corporations offer pass-through taxation, meaning that profits and losses are passed through to the shareholders, who report them on their individual tax returns. This can result in significant tax savings compared to other business structures, such as C Corporations.

In addition to the tax benefits, choosing to start an Alabama S Corp can also provide you with increased flexibility in terms of ownership and management. S Corporations allow for different classes of stock, which can be useful for attracting investors and structuring ownership in a way that suits your business needs. Furthermore, there are fewer restrictions on who can be a shareholder in an S Corp compared to other business structures.

Another key advantage of choosing an Alabama S Corp is the limited liability protection it offers. While all business structures provide some level of liability protection, S Corporations offer increased protection of personal assets. This means that in the event of a lawsuit or bankruptcy, creditors can only go after the assets of the business, not the personal assets of the shareholders.

Finally, starting an Alabama S Corp can also help legitimize your business in the eyes of customers, vendors, and investors. S Corporations are viewed as more credible and stable compared to other business structures, which can help attract quality employees, negotiate better deals with vendors, and attract funding from investors.

In conclusion, there are many compelling reasons to consider starting an Alabama S Corp for your business. From tax benefits to increased flexibility and limited liability protection, choosing this business structure can help set you up for success and growth in the long run. If you are looking to take your business to the next level, starting an S Corp in Alabama may be the right move for you.

Conclusion

Forming an S-Corporation in Alabama can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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