Are you considering incorporating your business in Alabama? Forming an S Corporation in the Heart of Dixie offers various advantages that could significantly benefit your entrepreneurial journey. With its business-friendly climate and supportive infrastructure, Alabama is ideal for entrepreneurs seeking growth opportunities, financial incentives, and legal protections.

With MaxFilings, setting up your S corp in Alabama is easier and more streamlined. Whether you’re a local startup or looking to expand your business footprint, Alabama’s welcoming environment and the efficiency of our online incorporation services make it a compelling choice for your business venture.

Alabama S corp taxation

Unlike C corps, an S corp does not pay income taxes directly in Alabama. Instead, when an S corp has more than one shareholder, it files tax returns, and the individual shareholders must report their share of the corporation’s income or loss on their personal tax returns. This process aligns with the taxation methods in sole proprietorships, partnerships, and Limited Liability Companies (LLCs).

To become an S corp in Alabama, a business must file an IRS Form 2553 with the Internal Revenue Service. Additionally, a few states require a separate state election filing to qualify as a Sub S Corporation. Only Arkansas, New Jersey, New York, Ohio, and Wisconsin mandate this state-level filing alongside the IRS filing.

MaxFilings assists with the filing process of IRS Form 2553. We prepare the form and send it to our clients with complete instructions for completion and submission to the IRS.

Some points to consider when forming an Alabama S corp

Overview

• You must file official documents with the state to form an Alabama corporation and pay state filing fees.
• File Form 2553 with the IRS to elect special tax status.
• By law, an Alabama S corp is separate from its owners (shareholders).
• Alabama S corps faces some limitations in the types of business they can conduct.
• You must document meetings of the stockholders and board of directors in minutes.
• Alabama S corps cannot have more than 100 shareholders. These shareholders cannot be other corporations, Limited Liability Companies (LLCs), partnerships, certain trusts, or non-resident aliens.

Limited liability

• Alabama S corp shareholders usually enjoy limited liability, risking only the amount they invested in the corporation.
• Shareholders of Alabama S corps are generally not liable for legal judgments against the corporation or any of its debts or obligations.
• Protecting personal assets is a major reason State business owners incorporate.
• Exceptions exist where shareholders can be held liable.

Raising capital

• Alabama S corps can raise additional capital more easily than other businesses by issuing and selling stock or other financial instruments.
• The sale of stock may be subject to state and federal securities laws.
• Ownership transfers occur through the sale of stock in the corporation.
• Alabama S corps may have only one class of stock, although voting rights can vary.

Taxation

• Alabama S corps are usually audited less frequently than sole proprietorships and partnerships.
• Shareholders avoid “double taxation” due to pass-through taxation.
• Alabama S corps file informational tax returns but do not pay income tax themselves.
• Shareholders report their share of income and losses on their personal tax returns, using losses to offset other income.
• Income and losses are allocated based on ownership percentages.
• Owners’ self-employment taxes do not apply to salaries paid by the corporation.

Owners & employees

• Major shareholders may face limitations on certain fringe benefits.
• Owners working in the business as employees are eligible for fringe benefits like group insurance plans, retirement and profit-sharing plans, and tax-favoured stock options and bonus plans.
• Employees often prefer working for a corporation that offers stock options and bonuses.
• Unlike some other business types, a corporation is immortal and perpetual, not ending with the death of a shareholder.

Public perception

• The general public often views corporations as more substantial than sole proprietorships and partnerships.

How to form an Alabama S corp

Follow these steps to form your Alabama S corp:

Step 1: Form a base corporation or LLC

Before achieving S corp status in Alabama, you need to establish a foundational business structure. This could be a Limited Liability Company (LLC) or a C corp.

Step 2: Filing for S corp status

Once the state officially recognizes your LLC or C corporation, your next step is to file IRS Form 2553, the Election by a Small Business Corporation form. This step is crucial to be recognized as an S Corp. The filing must happen within 75 days of your LLC or corporation’s formation or in the same timeframe before the start of the tax year when you want the S corp status to take effect. If you’re an LLC past this 75-day window, you must also file Form 8832 to be taxed as a corporation before filing Form 2553. Ensure all shareholders or members sign the consent statement on the form.

Step 3: Registering your business in Alabama

After the IRS accepts your business as an S corp, you must also file Form 20S with the Alabama state government to be recognized as an S corp for state income tax purposes.

Step 4: Maintaining compliance

Annually, the Alabama S corps must file the Business Privilege Tax Return and Annual Report (Form PPT), along with the Alabama Secretary of State Corporation Annual Report (Schedule AL-CAR). This combines basic business information updates with a tax return for the Business Privilege Tax. If your S corp was formed as a corporation, you must maintain records of all meetings and actions taken by shareholders, directors, and committees. Additionally, corporations must hold annual shareholder meetings as their bylaws dictate and notify shareholders in advance.

Step 5: Understanding ongoing requirements

Be aware of other requirements, such as renewing business licenses and permits. Always stay informed about the specific obligations for your Alabama S corp.