Start an S Corporation in Alabama

Are you interested in forming an S corporation in Alabama? If you don’t have your own business entity yet, this article will show you how to start an Alabama corporation and then file for S corp status with the IRS. We'll also review the pros and cons of this tax designation.

S Corporation in Alabama: Key Points

• An S corporation is not a business entity but a tax classification the IRS offers.

• The process for filing for S corp status is an S corp election with form 2553.

• Eligible C corporations and LLCs can elect to be an S corp if they meet all the requirements.

What Is an S Corporation?

S corporations are business entities that have asked the IRS to invoke subchapter S of the Internal Revenue Code when charging Federal income taxes. If they qualify, the IRS grants them S corp status, and they are said to be S corporations. The process of filing for S corp status is called an S corp election. 

To be eligible for S corp status, your business entity must be a C corporation, limited liability company (LLC), or partnership, among other requirements. Note that S corp status is a Federal tax classification, not a business structure. Therefore, S corporations retain their business structure when they receive S corp status.

S corp status can provide significant tax benefits to small businesses. But they also require significantly more paperwork than an LLC, and their limitations could hinder some businesses.

Tax Considerations for an S Corporation in Alabama

Alabama Tax Treatment of S Corporations

Alabama recognizes S corporations in accordance with Federal tax law. The state requires S corps to file their own tax return, Alabama Form 20S.[1] 

At the state level, S corporations are taxed just like any other Alabama corporation. This means they will owe the 6.5% Alabama corporate income tax.[2]

Alabama Franchise Tax for S Corporations

Alabama has a general corporate tax called a Business Privilege Tax (BPT) that charges all corporations and businesses for the “privilege” of doing business in the state.[3] The minimum BPT is $100 and is determined by the net worth of your business.

Pass-Through Taxation

S corporations don’t pay corporate tax at the Federal level. Instead, profit or losses “pass-through” to the shareholders' personal tax returns. This allows them to avoid the double taxation that burdens traditional corporations. This so-called pass-through taxation is the major advantage to S corp status for Alabama corporations.

Potential Savings on Self-Employment Tax

If your LLC becomes an S corporation, it may help you reduce your self-employment tax liability. This is because while S corporation shareholders must be paid a “reasonable” salary for all the work they do for the corporation, they can also take additional compensation as “distributions” that are not subject to self-employment taxes.

Requirements for Forming an S Corporation in Alabama

Before you decide that S corp status is right for your small business, you’ll want to note the following limitations the IRS places on S corporations:[4]

• Be a C corporation, limited liability company, or partnership

• Be located in the United States

• Not have partnerships, corporations, or “non-resident aliens” as S corporation shareholders

• Only have 100 or fewer shareholders

• Only issue one class of stock

Note that certain financial institutions, insurance companies, and domestic international sales corporations are ineligible for S corp status.

When your potential S corporation shareholders are all eligible, and you have determined that the limitations of S corp status are still compatible with your business plan, you’re ready to start your S corporation.

Filing as an S Corp in Alabama

Below, we’ve detailed everything you need to know to start an S corporation in Alabama. If your LLC or C corp has already been incorporated and is a domestic entity in Alabama, you can skip to Step 6.

Step 1: Choose a Business Name

What name will you use for S corporation in Alabama? This question may seem simple, but some details regarding your business name need to fall into place, or it could derail your entire process.

The Alabama Secretary of State must approve your business name, or they will reject your certificate of formation. Make sure your name:

• Includes either the word  “corporation” or “incorporated” or one of its abbreviations

• Does not falsely imply that it does a different type of business than it does

• Is “distinguishable” from other registered businesses in Alabama with a business name search tool

When you’ve found the perfect business name and it’s available, put in a name reservation online with the Alabama Secretary of State. Your name reservation is good for one year. You will need your name reservation to file your certificate of incorporation.[5]

Next, verify that a web domain and relevant social media handles are available for your business name so you can execute a sound marketing plan. Also, investigate trademarking your name at the state or Federal level.

Step 2: Appoint Directors and a Registered Agent

An Alabama corporation has a simple structure that you need to follow. You can think of it as a structure with these three parts:

1. Shareholders

Shareholders provide capital for the business and are its owners, but they don’t necessarily have a hand in the day-to-day operations. They do, however, appoint the board of directors.

2. Directors

The shareholder-appointed board of directors oversees the business’s prosperity in the near- and long term. The board of directors meets at least annually, as required by law, or more frequently, depending on the corporation’s bylaws.

3. Officers

The board of directors hires executive officers (such as CEO, CFO, and COO) to carry out the business's daily operations.

In a simple business structure, such as one owned and controlled by a single person, shareholders can also serve as directors and officers, depending on how they contribute to the business. A board of directors can be very small, even just one person.

When you get ready to incorporate your business, you’ll need your S corporation shareholders identified so they can sign on to the company at its inception. Those shareholders also need to agree on a group of S corp directors who will take responsibility for stewarding the business.

Your Alabama Registered Agent

In addition to shareholders and directors, you must secure an Alabama registered agent that agrees to serve your company before you file your certificate of formation. Your registered agent must have a physical address (not a P.O. Box) in Alabama and keep regular hours at that office.

What’s a registered agent? If you’re getting sued, summoned to court, or otherwise involved in a legal issue, the court will contact your registered agent on file with the state and send legal documents and correspondence to that office.

This means you’ll want an Alabama registered agent that is experienced, professional, and trustworthy. Lost or unforwarded legal documents could sink your business in a heartbeat. We recommend you choose Swyft Filings as your registered agent. We’ve helped thousands of Alabama businesses like yours stay in good standing.

Step 3: File Articles of Organization

Now that you’ve chosen your business name, registered agent, and S corp directors, you’re ready to do the paperwork that makes your business the real deal. 

To register your business with the state of Alabama, you’ll have to fill out a simple form called a certificate of incorporation or certificate of formation. Many states call this form the articles of incorporation. You want to get this one right on the first try because the filing fee is $200.

This is what you’ll need:

• Business name

• Name reservation

• Street address of the business’s “principal office” and registered agent

• Name of registered agent

• Purpose of the corporation’s formation

• Amount of stock the corporation has decided to issue

• Names and street addresses of the businesses’ incorporators

• Payment of $200

You can file your certificate of formation online or print the form and mail it to the Alabama Secretary of State in Montgomery.[6]

When your certificate of formation is accepted, you must file a return for your initial franchise tax (Business Privilege Tax) within two and a half months. Your next BPT return will be due with your annual report the following year.

Step 4: Create an S Corp Operating Agreement

All business owners in an S corporation should sign a governing document called bylaws. LLCs use a more simple model called an operating agreement. Bylaws lay out essential procedures and structure of your corporation, such as:

• How often will the board of directors meet?

• How long will each board member serve?

• How many directors will be on the board?

• How exactly will power be distributed between officers and board members or board members and shareholders?

• What are the specific responsibilities of the company’s officers?

• Under what circumstances will the corporation dissolve?  

Bylaws are a critical guardrail against outside meddling and internal disputation. You may consult an attorney as you draw up bylaws for your S corporation. For an affordable rate, we can also help shape your bylaws by asking you a few simple questions.

Step 5: Apply for an Employer Identification Number

Every business needs an Employer Identification Number (EIN) to do legitimate business. You can apply for an EIN for free right here on our site. 

Your EIN is officially used to pay Federal taxes, including income tax and payroll and employment taxes. But you’ll also need it to register for state taxes, business licenses, permits, bank accounts, credit cards, and other critical business functions. 

Step 6: File Form 2553 for S Corporation Election

For your business entity to have S corp status, you must file Form 2553, the S corporation election form, to the IRS. To have S corp status for the current tax year, make sure to file within two months and fifteen days of the start of the year. For the coming tax year, you can file anytime.

If you miss the deadline but still want S corp status for the current year, you’ll need to provide a reason why you’ve missed it, and you will need to pay significant extra fees to get it. LLCs filing past the deadline must file Form 8832 at the same time as their S corporation election.

Alabama S Corp vs. Alabama LLC

If you have one, your LLC already enjoys pass-through taxation. So what’s the point, you might ask, of filing for S corp status? This is a good question, and below, we lay out the pros and cons in Alabama between an LLC and an S corporation.

Remember, however, that if your LLC files an S corporation election, it’s still an LLC. What changes is its Federal tax designation.

Advantages of Starting an LLC in Alabama

Alabama LLCs are low-maintenance and have a straightforward, usually advantageous tax treatment. They benefit from the simplicity of pass-through taxation, and their members have solid limited liability protections of a larger corporate structure.

Disadvantages of Starting an LLC in Alabama

LLC members owe self-employment tax on all of their earnings, and this can cut into their take-home pay if they’re drawing down substantial profits. 

Advantages of forming an S Corporation in Alabama

After S corporation shareholders are paid a “reasonable” salary for their services to the business, they can take distributions on their earnings that won’t be subject to self-employment taxes. This tax treatment is a crucial motivation for Alabama LLCs to file an S corporation election.

Disadvantages of forming an S Corporation in Alabama

In contrast with the simplicity and convenience of the limited liability company, S corp status comes with more work. Anyone who does work for the business will need to be an employee, which increases the administrative burden if you’re not already running payroll. 

S corporations also have significant limitations that could get in the way of your business plan. For example, an LLC can have any number of members, but S corps are limited to 100 shareholders. Also, if your LLC has other companies or non-resident citizens as members, you won’t be eligible for S corp status.

Ready to File for S Corp Status in Alabama?

It already costs several hundred dollars in state filing fees to start your S corporation in Alabama, so the last thing you need is a mistake that costs you more time and money doing the process again.

Let Swyft Filings handle your S corp formation for you. After we get your certificate of formation ready, we can also take care of your S corp election, ensuring you meet all the S corp limitations and never have to repeat any part of the process.

Business owners have more important things to do than paperwork. Try our best-in-class professional filing service to get your S corp status quickly, but most importantly—flawlessly.

Frequently Asked Questions

What is an S Corporation in Alabama?

An Alabama S corporation is a limited liability company, C corporation, or partnership that files an S corporation election with the IRS.

Does Alabama recognize S corporations?

Yes, Alabama recognizes S corporations.

What is the turnaround time for filing for S corp status with the IRS?

The IRS estimates a turnaround time of 60 days for Form 2553, the S corporation election.

What is the difference between an S corp and an LLC?

S corp status is a tax status under subchapter S of the Internal Revenue Code; LLC is a business structure.

What are the requirements for an S corporation in Alabama?

S corporations can only have 100 or fewer shareholders, the shareholders can only be certain entities (and not partnerships or corporations), and they can only issue one class of stock, among other requirements.

Are taxes for LLCs and S corps the same?

No, S corporations have a different tax treatment for shareholders, who can take distributions independent of self-employment tax and must go on payroll for the work they do for the company.

What is the S corp tax rate?

Alabama’s corporate income tax is 6.5%. Federal income tax will pass to the personal income tax returns of shareholders.

How do I dissolve an S corporation in Alabama?

You can file articles of dissolution with the Alabama Secretary of State online. The filing fee is $100.

Bibliography

1. Alabama Department of Revenue. “Does Alabama recognize the federal election to be treated as an S corporation?” Accessed March 6, 2023.

2. Alabama Department of Revenue. “Corporate Income Filing Requirements.” Accessed March 6, 2023.

3. Alabama Department of Revenue, YouTube. “Business Income Tax: Business Privilege Tax.” Accessed March 6, 2023.

4. Internal Revenue Service. “S Corporations.” Accessed March 6, 2023.

5. State of Alabama Law Institute. “Article 5 Names of Entities, Registered Agents and Registered Offices.” Accessed March 6, 2023.

6. State of Alabama. “Domestic Business Corporation Certificate of Formation.” Accessed March 6, 2023.