If you want to learn more about S Corps in Alabama, you’re in the right place. 

An S Corporation is a great option for business owners looking for a business structure that will help raise capital and cut down on tax liabilities. This is because rather than being a formal entity structure like a corporation or limited liability company, an S Corp is actually a type of federal tax classification approved by the Internal Revenue Service. To become an S Corporation, an Alabama corporation or LLC makes an S Corp tax status election with the IRS. This S Corp election allows an entity to pass its tax obligations through to its shareholders for taxation on their individual returns.

How to Start an S Corporation in Alabama

Starting your own business is an exciting venture, but it can also be stressful and time-consuming. That’s why we’ve made it our mission to help business owners just like you throughout the business life cycle.

1. Choose a Business Name

After taking the preliminary steps of creating a business plan and selecting an entity structure for your business, the first step toward creating your Alabama S Corp is to choose a name. However, be sure to check the state business records to verify that the name you want for your business isn’t already being used by another Alabama business entity. 

Once you’ve confirmed that your desired name is available, we can help you reserve your business name to ensure that nobody takes it while you complete the business formation process.

2. Appoint a Registered Agent in Alabama

Next, you’ll need to choose an Alabama registered agent for the business. This agent serves as the official recipient for any service of process and other important legal notices and must be available during normal business hours. 

3. Choose Directors or Managers

Now you’re ready to select the people that will manage the business. For a corporation, these individuals are called directors. For an LLC, on the other hand, they will be managers. An LLC can be managed either by its members (member-managed) or a hired manager (manager-managed).

4. File Certificate of Incorporation with the Alabama Secretary of State

Finally, it’s time to register your business with the state. You will do so by filing a Certificate of Incorporation for corporations or a Certificate of Formation for LLCs with the Alabama Secretary of State. These documents formally create the legal business entity.     

Before moving forward with the next step, you’ll also want to obtain an Employer Identification Number (EIN) for your business. We can help you do that with our EIN Service.

5. File Form 2553 to Turn Business into an S Corporation

Once you have a legally recognized business entity, you’re ready to turn it into an S Corporation.

Regardless of whether you’ve decided to set up your business as a corporation or an LLC, to turn it into an S Corp, you’ll need to file a Form 2553 with the IRS. This is what formally allows you to request a status change to an S Corporation. 

For LLCs, however, before filing your Form 2553, you’ll first need to change your entity classification to S corporation tax status by filing IRS a Form 8832. 

What to know before creating an S Corporation in Alabama

Importantly, the default classification for entities upon formation is a C Corp. Thus, unless and until you file your Form 2553, your entity will be treated as a C Corporation. However, there are a few key considerations to note before choosing an S Corp election. 

Requirements and limitations of S Corporations

Not all entities can choose an S Corp election. To qualify for S Corporation classification, an entity must:

• Be a domestic corporation
• Have only allowable shareholders, which include individuals, certain trusts, and estates
• Have no more than 100 shareholders
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have only one class of stock

If your business entity meets these filing requirements, you may choose an S Corp election. 

File Form 2553 with the IRS

It’s also important to know when to make your S Corp election. Specifically, you will need to complete and file your Form 2553 with the IRS: 

• No more than 2 months and 15 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect

For more information on when and how to file your Form 2553, visit the IRS’s website. 

What is an S Corporation?

So, what exactly is an S Corporation? In short, an S Corp is a corporation that has elected to pass its corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. 

This is often referred to as “pass-through taxation” and allows the business entity to avoid double taxation on its corporate income. 

What’s the difference between an S Corporation and a C Corporation?

There are a few key differences between S Corporations and C Corporations. 

Whereas S Corps benefit from pass-through taxation, C Corps don’t. Rather, C Corps must file and pay income taxes at the corporate level, and their shareholders must also pay taxes on those same profits on their own individual income taxes. 

However, the pass-through taxation benefit of S Corps comes at a cost. Due to the number of requirements to qualify for an S Corp election, C Corps offer more flexibility in options and structure. 

What are the requirements to create an S Corporation? 

In short, to create an S Corporation, you must first have a business that complies with the requirements and limitations identified above. If your business qualifies for S Corp classification, you must then file Form 2553 with the IRS within one of the timeframes listed above.

Can LLCs choose an S Corporation election? 

Contrary to what the name might imply, your entity doesn’t have to be a corporation to qualify for S Corp classification. LLCs can also make an S Corp election. And in fact, many choose to do so for a variety of beneficial tax purposes. 

Weighing the pros and cons of creating an S Corporation

As with all things in life, there are a number of competing pros and cons of choosing to create an S Corporation. Some pros include: 

• Asset protection
• Pass-through taxation
• Tax-favorable characterization of income
• Ability to utilize cash method of accounting

However, there are certain disadvantages to be aware of as well. Common cons of forming an S Corporation include: 

• Higher formation and maintenance expenses
• Tighter tax qualification obligations
• Stock ownership restrictions
• Closer IRS scrutiny
• Less flexibility in allocating income and losses

S Corp election may not be right for all businesses. Ultimately, the decision of whether to elect S Corp classification will depend on the needs and goals of your particular entity. 

How we can help

Ready to take the next steps toward forming your Alabama S Corp? From business formation to compliance and maintenance, we’re standing by and ready to help support you at every step along the way. Start your company and file an S Corp with us today.

We can also help get your business off the ground with our Alabama Corporate Formation Service and LLC Formation Service.

No matter what type of business you operate, check out our many products and services and find out what we can do to help you start, manage, and grow your business today.  

Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.