The Corporation is a business structure that provides personal liability protection by separating the owner’s personal assets from the assets of the business. A corporation is liable for the actions and finances of the business, while the owners (known as shareholders) are not.
- Corporations provide liability protection for the shareholders
- A corporation can raise non-debt financing by selling shares of the business
- Taxation may be lower than a sole proprietorship or partnership
- Corporations are more complex and expensive to set up than sole proprietorships, partnerships, and Limited Liability Companies (LLC)
- At a minimum, corporations are required to hold an annual board of directors meeting, shareholders meeting, take minutes at the meetings, issue shares, etc., to maintain the entity’s liability protection.
Generally, Corporations are chosen over a Limited Liability Company when a significant amount of funding is being raised from investors. However, due to the cost and complexity of the Corporation, most small businesses are better off forming an LLC.
Related: How to Form an LLC in Alabama
The following steps are to create a domestic Corporation, which is the most common type for businesses. The other types of Corporations in Alabama include a foreign Corporation (an out-of-state Corporation wanting approval to physically operate in the state), a professional Corporation (designated for Corporations offering professional services), or a non-profit Corporation.
Steps to Forming a Corporation in Alabama
Step 1: Choose a Name
The first step in forming a Corporation in Alabama is selecting a name.
The name of the Corporation has to be different from other entity names in the state of Alabama. Check Available Corporation names in Alabama.
The name of the Corporation must include one of the following designators at the end of the business name:
- Or an abbreviation of one of those words – Corp., Co., Inc., or Ltd.
A comma may be used after the business name and before the designator. “Common Grounds Coffee Inc.” and “Common Grounds Coffee, Inc.” are both acceptable.
After verifying the name is available, the state of Alabama requires that you reserve the name before filing the Certificate of Incorporation. You can do so by filing for a Name Reservation and paying the $25 filing fee. The Name Reservation certificate will be filed along with the formation paperwork.
Before selecting a name, you may also want to see if the domain name is also available.
While a Corporation has to select a unique name that another Alabama Corporation isn’t using, that doesn’t guarantee the name isn’t being used by someone else. Before registering a Corporation name, be sure to do a trademark search to verify it is available for you to use.
Step 2: Choose a Registered Agent
To have a Corporation in Alabama, an Alabama Registered Agent must be identified to act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the Corporation. This can either be a resident of Alabama or commercial registered agent service.
You can act as your own registered agent in Alabama, and you are not required to pay for a registered agent. The requirements to be a Registered Agent are generally available during normal business hours and have a physical street address in the state. A PO Box is not allowed.
Any individual meeting the requirements can be the agent; however, the agent’s name and address will become public record, and with that comes a loss of privacy. This is more important for some entrepreneurs, especially when doing business from home or are still employed. Hiring a company like Northwest Registered Agent to be the Registered Agent will help protect their privacy.
Related: Do I Need a Registered Agent in Alabama?
Step 3: File the Alabama Certificate of Incorporation
Next, you can start filing the Certificate of Incorporation (referred to as the Articles of Incorporation in many states) with the Secretary of State’s website. The Certificate of Incorporation can be filed online with the Alabama of State’s website (additional processing fees apply) or with the paper form.
The information requested includes:
- The name of the Corporation, which must contain the word “Corporation,” “Incorporated,” or an abbreviation of one of these words.
- A copy of the Name Reservation certificate
- Physical address of the Corporation’s principal office (PO Boxes are not allowed)
- Mailing address of the Corporation if it is different from the physical address
- Registered Agent’s name and the physical address of the registered office
- The purpose of why the Corporation is being organized. In most cases, a Corporation will choose to only use the general business purpose statement, “the purpose includes the transaction of any lawful business for which corporations may be incorporated in Alabama
- under Title 10A, Chapter 2A of the Code of Alabama.” A specific business purpose may restrict what the business does.
- Information regarding the shares of the Corporation. This section includes the number of shares authorized and the par value (minimum price) of those shares.
- The number, names, and addresses of the initial directors is an optional section (though there must be a minimum number of one director. Be aware that these names will be included as public record.
- Name, address, and signature of the incorporator. This can be one of the owners of the Corporation or someone helping with the formation of the entity.
The Alabama Certificate of Incorporation can be filed online or submitted by mail. If mailing, send one signed original and one copy of the completed form along with a self-addressed, stamped envelope with the $200 Secretary of State fee to:
Alabama Secretary of State
P.O. Box 5616
Montgomery, Alabama 36103-5616
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Step 4: Create Corporate Bylaws
Bylaws are basically the overall guiding principles and procedures of the operations of the business. The bylaws include the name of the officers of the corporation, responsibilities of the board members, terms of office, procedures for removing or adding a new director or shareholder, policies for authorizing new shares, when shareholder and director meetings will be held, and more.
Bylaws are required in Alabama, however, they aren’t filed with the state. An attorney can help draft bylaws, or you can use a template to generate your own with LawDepot or RocketLawyer.
Step 5: Hold the Initial Board of Directors Meeting
During the first board meeting, the board of directors at a minimum will elect the officers of the corporation (the President, Vice President, Treasurer, and Secretary), review and approve corporate bylaws, choose a bank, issue shares of stock, and decide whether the Corporation will be taxed as a C corporation or S corporation.
It’s critical to remember that taking meeting minutes at all meetings is necessary to protect the shareholders from lawsuits and court actions. The minutes provide a record of all decisions and actions taken during the meeting. Minutes aren’t filed with the state, however, they need to be stored with other Corporate documents.
Step 6: Issue Shares of Stock
In exchange for money or services, the Corporation can exchange shares of stock. The number of shares of stock issued cannot be more than the number of authorized shares listed in the Certificate of Incorporation.
If you are using an attorney to create the bylaws, they can also create the shares of stock. Alternatively, a Corporate Kit can be purchased from Amazon, which has a corporate records book, blank stock certificates, initial meeting minutes template, corporate seal, and more.
Step 7: Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies the Corporation for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Related: How to Apply for an EIN
Step 8: Elect the Corporation’s Form of Federal Income Taxation
By default, a new corporation will be taxed by the Internal Revenue Service (IRS) like a C-Corporation. C-Corporations pay corporate taxes on their profits, and the owners pay personal income taxes on their dividends.
A Corporation can elect to be taxed as an S-Corporation. S-Corporations are taxed as “pass-through entities,” which means the Corporation itself does not file corporate taxes. Instead, the profits (or losses) “pass through” to the shareholders, who then report this income on their individual taxes.
For most small businesses, the S-Corporation tax election is the most beneficial because it eliminates the double taxation of the C-Corporation. This tax election can be changed, however, it is highly recommended to talk with an accountant before making this decision.
Step 9: Open a Bank Account
Opening a bank account for your Corporation is important for liability protection as the bank account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original Certificate of Incorporation showing the creation of the Corporation in addition to the bylaws.
- Driver’s licenses of the members.
- Depending on the age of the Corporation, an Alabama Certificate of Good Standing may be needed to prove the business entity is active and in good standing with the state.
Related: How to Open a Business Bank Account
Step 10: Apply for Business Licenses and Permits
Depending on what your business does and where it is located, there will likely be various business licenses and permits needed before starting your business. Some common registrations include:
- Business License – Some states and several cities require businesses to obtain licensing before they can start.
- Professional License – Certain services such as barbershops, HVAC contractors, real estate appraisers, and more must be registered with the state.
- Sales Tax Permit – To sell products and certain services, registration with the Alabama Department of Revenue will be necessary.
Related: What Business Licenses are Needed in Alabama?
Step 11: File the Initial Report
Within 2.5 months of registering a Corporation, the Alabama Initial Report and Initial Business Privilege Tax Return (Form BPT-IN). The Privilege Tax is assessed on businesses for the “privilege” of operating in the state of Alabama.
Learn more about the Business Privilege Tax from the Alabama Department of Revenue.
Step 12: File Annual Reports
Corporations must submit an annual report with the Alabama Secretary of State by filing Alabama Business Privilege Tax Return and Annual Report (Form CPT). The annual report is due April 15th of each year.
The fee for the annual report is $10.
The tax rate for business privilege tax is based on the Corporation’s net worth. The rates range from $0.25 to $1.75 for each $1,000 of net worth in Alabama. The minimum business privilege tax is $100.