Alabama is one of the fastest growing places in the nation to start and grow a business, according to a new national report. Entrepreneur.com ranked Alabama number five overall on its state list in the 2005 Hot States for Entrepreneurs. The state was ranked as the second best place in the nation to launch a new business and 12th best for rapid growth of a young company. Based on the Washington, D.C.- based National Policy Research Council’s Entrepreneurial Activity Index, the report highlights individual cities as well.
Alabama S Corporation:
A Alabama S Corporation is a corporation with 75 or fewer shareholders,that has elected and qualified for a special tax status with the Internal Revenue Service (IRS).
The main advantage associated with the S Corporation is that the income passes through to the shareholders, therefore avoiding a perceived double taxation of a C-Corporation.
Should I form an Alabama S Corporation?
The S Corporation:
An "S Corporation" is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code (enacted in 1958
and periodically amended) and receives IRS approval of its request for Subchapter S status. As a legal entity (an artificial
person), the S Corporation is separate and distinct from the corporation's owners (the stockholders).
Alabama S Corporation: Advantages and Disadvantages
Advantages of the S
Corporation:
The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued
operation of the business regardless of incapacity or death of one or more stockholders.
Fractional ownership shares are easily accommodated in the initial offering of stock.
The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.
The requirement that the corporation's finances and records be separate from the finances and records of stockholders
reduces the risk of unrecognized equity liquidations.
With only a few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no
income taxes and corporation income or loss is passed through direct to the stockholders.
To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.
The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication
within the stockholder group (often a family group) and can provide more comprehensive guidance for management.
Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit
and the ability to secure needed resources may be improved.
Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.
Disadvantages of the S Corporation:
Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the
limitation of liability.
Conflicts or disagreements among the stockholders may immobilize decision making.
Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders
from being able to recover the value of their investment in the corporation.
Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not
active in the business and they may become a voting block that does not support needs and decisions believed desirable by
managing stockholders.
Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business
to pay.
Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder
employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent
or more of the corporation stock.
If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the
appreciation amount will be generated.
Tax Details of starting a Business in Alabama
The Alabama income and property taxes are among the lowest found anywhere in the United States. In addition, Alabama offers statutory incentive programs such as a corporate income tax credit for qualifying companies. This includes the cost of land, buildings, machinery and equipment. The program provides an annual corporate income tax credit of five percent of the total capital cost of the project for 20 years. Assuming a total cost of $20 million in building and equipment, the abatement provides up to $1 million in credit against Alabama corporate income taxes each year for a term of 20 years.
The rate of corporate income taxation is 6.5%. With a net effective rate (after the federal income tax deduction) of 4.42%, Alabama still maintains one of the lowest corporate income tax rates in the nation. (Alabama Constitution, Amendment 212)
The Capital Investment Tax Credit, available each year for 20 years, is calculated at five percent (5%) of the total capital costs of the qualifying project and the credit begins in the year the qualifying project is "placed in service:' The capital credit is available to all types of business entities, including, but not limited to: C corporations, S corporations, limited liability companies (LLCs), partnerships, trusts, and sole proprietorships.
Act 2001-965 amended the income tax capital credit law to allow for lower thresholds for the requirements for new employees and for capital costs for projects locating or expanding in a "favored geographic area.”
