Corporation

A corporation has a more complex business structure than that of a proprietorship or general partnership. A corporation is a distinct legal entity separate from its owners. It is formed under the authority of a state government. If you own a corporation that does business in more than one state you must comply with that state's laws regarding qualifications of a corporation.

There are two types of corporations. They are designated a "C" corporation and an "S" corporation. The IRS classifies corporations for tax purposes. The State of Alabama defines C and S corporation for state tax purposes by IRS elections. Some states do not tax corporations at all. C corporations are taxed as separate legal entities from shareholders and pay their own taxes. Where as the profit of an "S" corporation is taxed to the shareholders.

Ordinarily the procedure needed to form a corporation is that a subscription for the capital stock must be taken and a tentative organization created. Articles of Incorporation must be filed with the local Probate Judge, who will file them with the Alabama Secretary of State.

Advantages

• Limited liability for the stockholder to a fixed amount of investment
• Ownership is easily transferred
• A corporation is a separate and distinct legal entity
• Capital is easier to obtain
• Stability and relative permanence of existence
• Delegated authority

Disadvantages

• Activities might be limited by the charter and various laws
• Minority stockholders could be exploited
• There are a lot of government regulations and required reports
• Less financial incentive for the manager
• Double-taxation - income tax on corporate net income and also on salaries and dividends in C corporations

S Corporation

An S Corporation is a legal corporation that is afforded special tax treatment under Subchapter S of the Internal Revenue Code. Under state law, S corporations retain the normal features of a C corporation, to include limited liability, but for federal and state tax purposes are treated much like a partnership. However, the stockholders must report corporate income, loss, deductions, and credits on their individual tax returns. You must file the appropriate form with the IRS to obtain subchapter S status.

Advantages

• Limited liability for the stockholder to a fixed amount of investment
• Ownership is easily transferred
• Separate and distinct legal entity
• Capital is relatively easy to obtain
• Stability and relative permanence of existence
• Delegated authority
• Taxed similar to partnership

Disadvantages

• Activities might be limited by the charter and various laws
• There are a lot of government regulations and required reports
• No more than 75 shareholders
• S Corporation can not own more than 80% of any other corporation
• Restrictions on who can own stock
• Stockholders must be resident or citizens of the USA
• Only one class of stock may be issued

Procedures for Incorporation

The following procedures apply to the formation of an Alabama (domestic) for profit corporation under Title 10-2A, Code of Alabama, 1975, as last amended.

1. The proposed name must be reserved with the Corporations Section of the Secretary of State. If the name is available, then a Certificate of Name Reservation is issued. You can accomplish this requirement by writing or calling the Corporate Section of the Secretary of State. The number and address are located at the end of these instructions. The State of Alabama requires that the name contain the word corporation, incorporated, or an abbreviation of one of the two.
   
2. Complete the preparation of the Articles of Incorporation in the format described in Section 10-2-2.02, Code of Alabama, 1975, as last amended. The necessary forms can be received from the Corporate Section of the Secretary of State or legal counsel.
   
3. The Certificate of Name Reservation issued by the Secretary of State, Articles of Incorporation, and applicable filing fees must be presented to the office of the Judge of Probate in the county in which the corporation's registered office is to be located. When submitting the Articles of Incorporation you must have the original copy along with two confirmed copies.
   
4. The Judge of Probate then reviews, and if acceptable, certifies the Articles of Incorporation and retains the original copy. One of the copies is returned to you along with the Certification of Incorporation.
   
   For more information on incorporation contact:
   
   Office of the Secretary of State
   Corporate Section
   P.O. Box 5616
   Montgomery, AL 36103-5616
   (334) 242-5324
   http://www.sos.state.al.us/business/corporations.cfm

Structures:

• Sole Proprietorship
• General Partnership
• Limited Partnership
• Limited Liability Company
• Limited Liability Partnership
• Corporation