S corporations (also known as Subchapter S corporations) are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
Be a domestic corporation
• Have only allowable shareholders
o may be individuals, certain trusts, and estates, and
o may not be partnerships, corporations, or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations).

In Alabama, as in other states, S corporations are recognized as pass-through entities for federal tax purposes, meaning they pass income, losses, deductions, and credits to their shareholders, who then report these on their personal tax returns. This structure avoids the double taxation typically experienced by C corporations, as S corporations do not pay federal income tax at the corporate level, except for certain taxes on built-in gains and passive income. To qualify as an S corporation, the entity must be a domestic corporation, have only allowable shareholders (including individuals, certain trusts, and estates, but not partnerships, other corporations, or non-resident alien shareholders), have no more than 100 shareholders, have only one class of stock, and not be an ineligible corporation (such as certain financial institutions, insurance companies, and domestic international sales corporations). Alabama conforms to the federal treatment of S corporations for state tax purposes, and these entities must also file an Alabama S Corporation Income Tax Return (Form 20S).