LLC vs S-Corp in Alabama

The Alabama Secretary of State handles entity formation. The IRS handles federal tax classification via Form 8832 and Form 2553. The Alabama Department of Revenue administers the Business Privilege Tax (BPT) and state income tax. An Alabama LLC can elect to be taxed as an S corporation for federal purposes. Alabama LLC basics. - Certificate of Formation filed with the Alabama Secretary of State. Verify current filing fee on the Secretary of State business-entities page. - LLCs are no longer required to file a separate annual report with the Secretary of State. For-profit corporations file an annual report with a $10 fee. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. - Initial Business Privilege Tax return (Form BPT-IN) is due within 2.5 months of organization or qualification. Alabama Business Privilege Tax. - The BPT applies to corporations, LLCs, LPs, and LLPs. It is based on the entity's Alabama net worth. - Beginning with tax years after December 31, 2023, entities with calculated BPT of $100 or less are fully exempt and are not required to file a return. - Entities above the $100 threshold file Form PPT (pass-through entities including LLCs and S corps) or Form CPT (C corporations). Alabama income tax. - Individual income tax is graduated up to 5 percent on Alabama-sourced income. - Pass-through income from an LLC or S corp flows to the owner's Alabama individual return. - Federal S corp status is recognized by Alabama. The S corp files Form 20S. - Alabama permits an elective pass-through entity tax for eligible S corporations and partnerships, which can allow the entity to pay state income tax at the entity level to preserve the federal SALT deduction for owners. Alabama S corp basics. - Federal S corp election is recognized by Alabama. The S corp is still subject to the BPT if above the $100 threshold. - Payroll. An S corp owner-employee must take a reasonable W-2 salary. Alabama state withholding and state unemployment tax through the Alabama Department of Labor apply. Why an Alabama trades shop might still elect S corp. The main reason is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Alabama's BPT exemption for small businesses means the state-side friction is modest for most new trades shops. Rule of thumb. Start as an Alabama LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp and consider the Alabama pass-through entity tax election. A CPA with Alabama construction clients can run the breakeven for your numbers and confirm the current BPT calculation.