Alabama S Corporation Advantages and Disadvantages
Alabama is one of the fastest growing States 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 2008 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.
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 SCorporation:
- 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.
Alabama's 2012 Business Tax Climate Ranks 20th
Alabama ranks 20th in the Tax Foundation's State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.
Tax Freedom Day Arrives on April 2 in Alabama
Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2011, Alabama taxpayers work until April 2 (ranked 43rd highest nationally), celebrating tax freedom a ten days before national Tax Freedom Day (April 12).
Alabama's State and Local Tax Burden Below National Average
During the past three decades, Alabama's state and local tax burden has been consistently below average. Alabama's 2009 tax burden of 8.5% of income is below the national average of 9.8%. Alabama's tax burden has decreased overall from 9.0% (39th nationally) in 1977 to 8.5% (40th nationally) in 2009. Alabama taxpayers pay $2,967 per capita in state and local taxes.
2012 State Business Tax Climate Index, Ninth Edition
Alabama's Individual Income Tax SystemAlabama's personal income tax system consists of three separate brackets with a top rate of 5% kicking in at an income level of $3,000. That top rate ranks 31st highest among states levying an individual income tax. Alabama's 2009 state-level individual income tax collections were $567 per person, which ranked 37th highest nationally.
Alabama's Corporate Income Tax System
Alabama's corporate tax structure consists of a flat rate of 6.5% on all corporate income. Among states levying corporate income taxes, Alabama's rate ranks 29th highest nationally. In FY2009, state-level corporate tax collections (excluding local taxes) were $105 per capita, which ranked 26th highest among states that tax corporate income.
Alabama Sales and Excise Taxes
Alabama levies a 4% general sales or use tax on consumers, which is below the national median of 5.85%, but localities are permitted to levy their own high sales taxes. 2007 combined state and local general and selective sales tax collections were $1,391 per person, which ranked 23rd highest nationally. Alabama's gasoline tax stands at $0.209 per gallon (35th nationally), while its cigarette tax stands at $0.425 per pack of twenty (45th nationally). Additionally, municipalities in Alabama have the authority to levy their own "local option" taxes on gasoline. The sales tax was adopted in 1936, the gasoline tax in 1923 and the cigarette tax in 1935.
Alabama Property Tax Collections Lowest in Nation
Alabama collects very little in property taxes compared to most other states. Alabama's localities collected $367.47 per capita in fiscal year 2006, the latest year for which the Census Bureau has released state-by-state data. The state government collected $54.63 per capita in property taxes, meaning Alabama's combined state and local property tax collection figure was $422.10 per capita in FY 2006-the lowest property tax collections in the nation.
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