How to Start an S Corp in Alabama
Forming an S corporation (S corp) in Alabama can help your business save on taxes, depending on your specific situation.
This guide will walk you through the steps required to set up an S corp in Alabama and determine if it’s the right choice for your business.
Read on to get started and see how an Alabama S corp could benefit you.
Pro Tip: Get a free consultation with a tax professional to determine if an S corp is right for you.
Factors to Consider Before Starting an S Corp
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Why a limited liability company (LLC) is the best structure for S corp tax status
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Why an LLC Is the Best Structure for the S Corp Tax Status
As entrepreneurs, we believe that starting an LLC is the best way for forming an S corporation because any advantages of forming a corporation are negated by S corp restrictions. LLCs are also easier to maintain than corporations.
Are S Corp Tax Advantages Right for You?
You need to know if the S corp tax status versus a default LLC tax status will be better for your business. To fully understand the tax advantages of an S corp, read our LLC vs. S corp guide.
Pro Tip: Get a free consultation with a tax professional to determine if an S corp is right for you.
How to Form an S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend not starting a corporation with the S corp tax status because the S corp negates all of the benefits of a corporation.
Want to form an S corp elsewhere? Check out our other How to Start an S corp guides to learn more.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Alabama
Starting an Alabama LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Northwest to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Certificate of Formation
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Alabama.
Be sure to choose a name that complies with Alabama naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for an Alabama LLC:
- You must reserve your LLC’s name before registering it.
- Your name must include the phrase “limited liability company” or one of its abbreviations (LLC or L.L.C.).
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Any banking-related name needs a letter from the Alabama Banking Commissioner’s Office, and any insurance-related name needs a letter from the Alabama Insurance Commissioner’s Office.
- Any name using a professional designation in the name (i.e., engineering, attorney) requires a copy of the license of one officer/member or a letter from the governing agency allowing the use of the name without licensing.
- Your name cannot include any words that indicate or imply that the LLC is engaged in a business that is not authorized by law to pursue.
- Your name must be distinguishable from any name on the record with the Secretary of State (words or abbreviations indicating the type of company such as LLC, Inc., etc. are not taken into account when determining distinguishability).
You can also read the Alabama state statutes about LLC naming guidelines for more information.
2. Is the name available in Alabama? You can use the business entity search on the Alabama Secretary of State website to see if your desired LLC name is available.
3. File an Alabama Name Reservation Form: You must file a Name Reservation Request Form online or by mail before registering an LLC in Alabama. If filing by mail, the form must be attached to the Certificate of Formation. The required Name Reservation fee is $25.
4. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don’t plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Step 2: Choose Your Alabama Registered Agent
You must elect a registered agent for Alabama LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC’s behalf. You will list your registered agent when you file your LLC’s Certificate of Formation.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Alabama LLC Certificate of Formation
The Alabama Certificate of Formation is used to officially register an LLC.
File Your Alabama Certificate of Formation
OPTION 1: File Online With Alabama Interactive
– OR –
OPTION 2: File by Mail
State Filing Cost: $200 (Nonrefundable)
Mailing Address:
Secretary of State, Business Services
P.O. Box 5616
Montgomery, AL 36103
Step 4: Create an LLC Operating Agreement
An LLC operating agreement (also known in the state as a limited liability company agreement) is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Alabama LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Alabama S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Alabama S Corp Compliant
Staying compliant with Alabama’s specific regulations is essential to maintaining your S corp’s good standing and enjoying the benefits of this tax status. Below are the key steps you must take to ensure your Alabama S corp remains compliant.
File the BOI Report
In Alabama, all S corporations (whether LLCs or corporations) must file a Beneficial Ownership Information (BOI) report with the Financial Crimes Enforcement Network (FinCEN). This mandatory report ensures that the federal government has current information about who owns or controls your business — a key part of maintaining compliance.
To get started, visit the FinCEN website.
Open a Dedicated Business Bank Account
Maintaining a clear separation between personal and business finances is crucial for protecting your S corp’s liability status in Alabama. A dedicated business bank account is necessary to preserve this legal separation and protect your personal assets.
Check out our review of the best banks for small business.
File an Alabama LLC Annual Report
Alabama law requires S corporations to file an annual report with the Secretary of State, ensuring that your business information remains up to date. This report is crucial for maintaining your LLC’s good standing and is due by March 15 each year. Failure to file can lead to penalties, including the revocation of your LLC.
You can submit your annual report online through the Alabama Secretary of State’s website.
Pay Alabama S Corp Taxes
Alabama State Taxes
Alabama’s tax regulations require S corporations to adhere to both federal and state tax obligations. The federal and state income tax applies to both your salary and distributions, which you report on your personal tax return.
Additionally, Alabama imposes a Business Privilege Tax based on your business’s net worth, which you must file and pay annually. Visit the Alabama Department of Revenue to learn more and file your taxes.
Alabama Sales and Use Tax
Alabama has a state sales tax rate of 4% with additional local sales taxes that may bring the total rate up to 10%. If your business sells taxable goods or services, you must register with the Alabama Department of Revenue.
You can pay these taxes online through the Alabama Department of Revenue’s website.
Additional State Taxes
Aside from state income taxes, Alabama may impose other taxes based on your business’s activities. These may include:
- Lodgings Tax
- Rental Tax
- Utility Tax
For more details, visit the Alabama Department of Revenue’s website.
Alabama Local Taxes
Local tax regulations vary across Alabama. Check with your local tax authority to ensure compliance with all local requirements and to obtain the necessary permits.
Obtain Necessary Alabama Business Licenses
To legally operate your Alabama S corp, you’ll need to obtain the appropriate business licenses at the state and local levels. For more detailed information on the specific licenses required, visit our Alabama Business License guide.
Start an S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation for which an LLC or a corporation can apply.
Is an S corp an LLC?
No. An S corp is a tax designation for which an LLC or a corporation can elect.
How do you form an S corp?
You can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).
What are the requirements for an S corp?
S corps must meet four requirements:
- They can have no more than 100 shareholders.
- All shareholders must be private individuals (not other business entities).
- Shareholders cannot be nonresident aliens.
- The business may only issue one class of stock-this means all members must have the same distribution amount.
What are the benefits of an S corp?
Owners of S corps are considered employees of their company and can save thousands of dollars on self-employment taxes as a result.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.
What is a reasonable salary for an S corp?
Unlike the default LLC business structure, in which owners must pay self-employment tax on all of the company’s profits, owners of S corps are considered employees of the business and only have to pay self-employment tax on a salary they receive. Any other money they take from the company’s profits in the form of disbursements isn’t subject to self-employment tax.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
What is pass-through taxation?
Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.
What is the S corp tax rate?
There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s profits. This rate depends on each owner’s personal income tax bracket.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.