In Alabama, you may incorporate a S corporation (S corp) by founding a limited liability company (LLC) or a corporation and then choosing S corp status from the IRS when applying for an EIN.
An S corporation is a tax categorization, not a company structure, according to the IRS. The S corp classification is used to lower a company’s tax burden.
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Considerations Before Forming a S Corp
You must examine the following things before founding a S corporation:
Is a S corporation the best option for your company?
S corporation limitations
Why is an LLC the ideal structure for the S corporation tax status?
Are the tax benefits of a S corporation good for you?
Is a S Corporation the Best Business Structure for You?
Restrictions on S Corporations
S corporations are restricted to one class of stock and 100 stockholders, among other things. For more information, see our What Is a S Corporation? guide.
Why is an LLC the best structure for S Corporation tax status?
As entrepreneurs, we feel that incorporating a S corporation via an LLC is the best option since the benefits of founding a corporation are offset by S corp limitations. LLCs are also less difficult to manage than corporations.
Are S Corporation Tax Benefits Right for You?
You must determine if the S corp tax status is preferable to the default LLC tax status for your company.
How to Form a S Corporation
There are two major methods to form a S corporation:
When requesting your employee identification number, organize an LLC and obtain S corp tax status from the IRS (EIN)
By creating a company and applying to the IRS for S corp status
We do not advocate forming a company with the S corp tax status since it undermines all of the advantages of forming a corporation.
Forming an LLC and Choosing S Corp Status in Alabama
To form an LLC and elect S corp status, follow these five simple steps:
Step 1: Give Your LLC a Name
Step 2: Select a Registered Agent.
Step 3: Submit your Certificate of Formation.
Create an Operating Agreement in Step 4
Step 5: Obtain an EIN and submit Form 2553 to elect S Corporation tax status.
Step 1: Give Your LLC a Name
The first and most significant step in forming an LLC in Alabama is deciding on a name.
Make sure your name conforms with Alabama naming regulations and is readily searched by prospective customers.
1. Follow the Alabama LLC naming guidelines:
Before registering your LLC, you must reserve its name.
The word “limited liability corporation” or one of its acronyms must be in your name (LLC or L.L.C.).
Your LLC’s name cannot include terms that may be confused with a government organization (FBI, Treasury, State Department, etc.).
Any name linked to banking requires a letter from the Alabama Banking Commissioner’s Office, and any name related to insurance requires a letter from the Alabama Insurance Commissioner’s Office.
Any name that includes a professional designation (for example, engineering or attorney) needs a copy of one officer’s or member’s license or a letter from the governing body permitting the use of the name without licensing.
Your name cannot include any terms that suggest or imply that the LLC is doing a business that is not permitted by law.
Your name must be distinct from any other name in the Secretary of State’s record (words or abbreviations indicating the type of company such as LLC, Inc., etc. are not taken into account when determining distinguishability).
2. Does the name exist in Alabama? You may check the Alabama Secretary of State website’s business entity search to discover whether your chosen LLC name is available.
3. Submit an Alabama Name Reservation Form: Before creating an LLC in Alabama, you must submit a Name Reservation Request Form either online or by mail. The form must be attached to the Certificate of Formation if filed by mail.
4. Is the URL accessible? We suggest that you check to see whether your company’s name is accessible as a web domain. Even if you don’t intend to construct a company website right away, you may want to purchase the URL to prevent others from gaining it.
Step 2: Select an Alabama Registered Agent
Alabama LLC must have a registered agent.
A registered agent for your LLC will accept legal papers and tax notifications on your behalf. When you submit your LLC’s Certificate of Formation, you will name your registered agent.
Many company owners opt to use the services of a registered agent. Many of these firms will incorporate your LLC for a modest price and provide free registered agent services for the first year.
Step 3: Fill out the Alabama LLC Formation Certificate.
The Alabama Certificate of Formation is used to properly establish a limited liability company (LLC).
Step 4: Draft an Operating Agreement for your LLC.
An LLC operating agreement (also known as a limited liability company agreement in the state) is a legal document that details the ownership and member responsibilities of your LLC.
Step 5: Apply for an EIN and fill out Form 2553 on the IRS website.
An EIN is a number assigned by the US Internal Revenue Service (IRS) to companies in order to identify and tax them. It is basically a business’s Social Security number.
When you apply directly with the IRS, EINs are free.
Select S Corporation Tax Status
The IRS will give a link to Form 2553, the Election by a Small Business form, during the online EIN application process.
For full assistance with completing the form, please see our Form 2553 Instructions page.