Start an Alabama S Corp

What to know before creating an S Corp 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 S Corporation tax status. 

Requirements and limitations of S Corporations

Not all entities can choose an S Corp election. To qualify for S Corp 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 the S Corporation tax status. 

File Form 2553 with the IRS

It’s also important to know when to select S Corporation tax status. 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’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. 

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.