Start an S Corporation in Tennessee

Have you been advised to make your Tennessee small business an S corporation? It’s more than a simple IRS form; it’s a big decision. 

This guide will help you weigh the pros and cons of S corp status for your business entity and show you how to start an S corporation in Tennessee. 

S Corporation in Tennessee: Key Points

• An S corporation is not a business structure but a tax classification from the IRS.

• You must form an eligible corporation or LLC before electing S corp status.

• S corp status offers pass-through taxation and lower self-employment tax, among other benefits.

What Is an S Corporation?

While the concept of an S corporation is often referred to as a business structure, like a partnership, limited liability company (LLC), or C corporation, it’s different. An S corporation is a business entity with S corp status, a tax classification from the IRS. An LLC or C corporation can file for S corp status and become an S corporation if they qualify.

To ask the IRS to tax your small business as an S corporation, you must file Form 2553, an S corp election. Your business entity then maintains its business structure as a C corporation, a partnership, or an LLC. What changes is its Federal tax designation.

Tax Considerations for an S Corporation in Tennessee

So how do your taxes change when you become an S corporation? Here’s what you can expect for tax treatment in Tennessee and at the Federal level if you file for S corp status.

Tennessee Tax Treatment of S Corporations

The state of Tennessee Department of Revenue recognizes S corporations as a valid tax classification. But S corp status pertains mainly to Federal income tax for the company’s shareholders. State taxes remain largely the same as any other Tennessee LLC, C corporation, or partnership. 

Tennessee Franchise Tax for S Corporations

S corporations in Tennessee are still obligated to pay an excise tax, which is effectively a corporate income tax, and franchise tax, which taxes 0.25% of the net worth or book value of your company’s property, whichever is valued higher. At a minimum, your franchise tax will be $100. The state excise tax is 6.5% of taxable income.[1]

Pass-Through Taxation

S corporations are taxed as “pass-through” entities, meaning their income and losses go through the business entity itself and pass to its shareholders’ personal tax returns. This allows S corporations to bypass the double taxation of a C corporation, like an LLC.

S Corp Distributions & Self-Employment Tax

S corps have another tax treatment that gives them a potential advantage over LLCs. After S corp shareholders are paid “reasonable” compensation for their work on behalf of the business, they can take distributions out of the company’s profits without paying self-employment tax. Shareholders still owe state personal income tax on these distributions.[2]

Requirements for Forming an S Corporation in Tennessee

Not every business qualifies for S corp status. Here are the limitations the IRS imposes:[3]

• Must be a domestic C corporation, limited liability company (LLC), or partnership

• Can only have 100 or fewer shareholders

• Cannot have nonresident foreign nationals, corporations, certain trusts, and partnerships as shareholders

• Can only issue one class of stock

If your company violates any of these requirements, the IRS will reject your S corp election. Note that these limitations may alter your company’s business plans for growth, investment, and potential partnerships.

Filing as an S Corp in Tennessee

Starting an S corporation in one fell swoop is impossible. You must first form a C corporation, partnership, or LLC and then file Form 2553 to the IRS to elect S corp status.

Here’s how to start an S corporation in Tennessee. If your business entity is already registered and in good standing, skip to Step 6 to learn more about IRS Form 2553.

Step 1: Choose a Business Name

Your first task is to name your S corporation in Tennessee. Your business name must include one of the required ending words or an abbreviation of one of the words: “incorporated,” “company,” or “corporation.”[4]

Of equal importance, your business name must be distinguishable from other registered business or trade names on file with the Tennessee Secretary of State. You can check this by performing a name search on the Tennessee Secretary of State website or use our free business name search tool.

If a name identical to your preferred business name is already taken, you can’t just change the required ending word, capitalization, a conjunction or preposition, or punctuation. Instead, your name has to have one or more different letters or words or a different sequence of letters or words from every other business name.

If your name is available, here’s what you can do next:

• Check trademarks at the state and Federal levels and consider trademarking your name

• Make sure a web domain and relevant social media handles are available.

• Fill out a name reservation form and submit it to the Tennessee Secretary of State’s office with a $20 filing fee to reserve your name for 120 days

Step 2: Appoint Directors and a Registered Agent

A registered agent receives legal correspondence, such as a subpoena or service of process, on behalf of your business. Your Tennessee corporation needs a registered agent based in Tennessee with a street address, not a P.O. box, where they maintain regular business hours.

When a court tries to contact you, time is of the essence, and mistakes can be catastrophic. This is why professional registered agent services are affordable and very sensible. We recommend our Tennessee registered agent service, which integrates seamlessly with our S corp formation service.

S Corp Directors 

A corporation is owned by its shareholders. But those shareholders don’t necessarily run the company. That’s up to the board of directors, who the S corporation shareholders appoint to oversee the well-being of the business. 

So to get your Tennessee corporation up and running, you’ll need to choose at least one S corp director. For starters, this could be just you. But a robust S corporation will have a board of directors elected by shareholders who rotate according to the company’s bylaws.

S corp directors must meet at least once annually to operate in good standing.

Step 3: File a Corporate Charter

Most states require C corporations to file articles of incorporation with a state office. LLCs usually file articles of organization. In Tennessee, this is called a charter. You must file a charter and pay the $100 filing fee to establish your corporation. You can file the charter online, by mail, or in person. 

You’ll need the following information to fill out your charter:

• Business name

• Name and address of your Tennessee registered agent

• Closing month of your fiscal year

• Duration of your corporation

• Number of shares of stock you’re going to issue (S corps can only issue one)

• Corporation’s office address

• Name, address, and signature of each incorporator

When the Tennessee Secretary of State accepts your charter, you can purchase a certificate of existence (certificate of formation) for a $20 filing fee.[5]

A year from your charter date, you will owe franchise tax and must file an annual report to stay in good standing and avoid being dissolved by the government.

Step 4: Create S Corp Bylaws

Your bylaws are a legal document signed by all the business owners that determine how the business will be administered and important decisions about the business will be made. LLCs have a similar document called an operating agreement.

Even if you’re running your business yourself, bylaws are essential. You will want to consult an attorney or business expert when you draw up bylaws for your business. We can help you create robust bylaws for a fraction of the fee you’d pay for an attorney, and you only have to answer a few questions in plain English.

Step 5: Apply for an Employer Identification Number

Your Employer Identification Number, or EIN, is as essential to your business as the charter. Without it, you can’t register to pay federal employment taxes, comply with state income tax laws, or even apply for permits and licenses, credit cards, bank loans, or bank accounts.

The IRS will issue you an EIN online. You can also leave the hassle to us, and we’ll obtain your EIN on your behalf.

Step 6: File Form 2553 for S Corporation Election

Now that you own a real Tennessee business, remember that it can’t be an S corporation until you file Form 2553 with the IRS. This form is your S corporation election notifying the IRS that you want S corp status. 

Ensure your business entity is not a sole proprietorship and meets all the S corp requirements before you file Form 2553. There are also deadlines depending on the tax year you’re filing for. For the current tax year, file within two months and 15 of the beginning of the year, or you’ll have to provide an explanation and could face huge penalties.[6]

LLCs filing after the deadline must include an additional form with the S corporation election called Form 8832.

Tennessee S Corp vs. Tennessee LLC

Why should you consider filing for S corp status if you already have a Tennessee LLC? Below, we get into the nuances. Remember that a limited liability company (LLC) or a C corporation can file an S corporation election. The pros and cons are different for each.

Advantages of Starting an LLC in Tennessee

Tennessee LLCs have a simple tax treatment. Members pay income tax on the company’s profits or losses on their personal tax returns and avoid Federal corporate taxes. The limited liability of a corporation also protects your personal assets.

Disadvantages of Starting an LLC in Tennessee

The LLC business structure will limit entrepreneurs seeking venture capital or growing their business with investment from stockholders. An LLC is closely tied to its membership and doesn’t change hands easily. Also, every penny that LLC members draw from their business will be subject to self-employment taxes.

Advantages of forming an S Corporation in Tennessee

With S corp status, LLC owners don’t have to give up the personal asset protections and pass-through taxation they already enjoy. And suppose the business is making significantly high profits. In that case, S corp shareholders can take distributions in addition to compensation not subject to self-employment taxes.

The chance to reduce self-employment tax liability is the main reason a Tennessee LLC would become an S corporation for tax purposes.

Disadvantages of forming an S Corporation in Tennessee

S corp status doesn’t benefit every kind of business. The new requirements for corporate records, payroll, board meetings, and state fees could outweigh the benefits of S corp tax treatment.

You’re also more likely to be audited by the IRS if you’re taking S corp distributions. And unless you’re clearing a very significant profit, you won’t save much on self-employment tax.

Ready to File for S Corp Status in Tennessee?

If you and your fellow business owners aren’t bothered by the S corp limitations and are ready to form an S corporation in Tennessee, you won’t want to waste any time on paperwork. And if you don’t enlist a professional formation service like Swyft Filings to file for S corp status on your behalf, you risk costly mistakes and expensive setbacks.

Whatever stage your small business is in, let us do your S corporation’s paperwork for you. You’ll have the peace of mind that experts are on it, and you’ll be free to do what no one else can: grow your business.

Frequently Asked Questions

What is an S Corporation in Tennessee?

An S corporation is an eligible business that meets the IRS requirements and files Form 2553, an S corporation election.

Does Tennessee recognize S corporations?

Tennessee does recognize S corporations and taxes them as pass-through entities. 

What is the turnaround time for filing for S corp status with the IRS?

The IRS says to expect an answer on your S corp election within 60 days of filing Form 2553.

What is the difference between an S corp and an LLC?

LLC refers to a business structure. S corporations are businesses that have a specific tax classification. LLCs can qualify to be S corps, but not all S corps are LLCs.

What are the requirements for an S corporation in Tennessee?

S corporations are limited in the number of shareholders they can have and who those shareholders can be. They also must only issue one class of stock and be a domestic company, among other limitations. 

Are taxes for LLCs and S corps the same?

LLCs and S corps both enjoy pass-through taxation, but substantial differences exist. S corps compensate their shareholders via payroll, and after paying out a reasonable salary, they can allocate distributions free from self-employment taxation.

What is the S corp tax rate?

S corporations are subject to the same business taxes as all other corporations in Tennessee, including franchise and excise taxes. Federal and state income taxes will depend on the personal tax returns of the S corporation’s shareholders.

How do I dissolve an S corporation in Tennessee?

File articles of dissolution with the Tennessee Secretary of State with a filing fee of $20. Make sure you’re following the dissolution rules of your bylaws.

Bibliography

1. Tennessee Department of Revenue. “Franchise Tax & Excise Tax.” Accessed February 23, 2023.

2. Tennessee Department of Revenue. “HIT-17-S-Corporation Distribution.” Accessed February 23, 2023.

3. Internal Revenue Service. “S Corporations.” Accessed February 22, 2023.

4. Tennessee Secretary of State Division of Business Services. “Name Availability Guidelines.” Accessed February 23, 2023.

5. Tennessee Secretary of State Division of Business Services. “Charter For-Profit Corporation.” Accessed February 23, 2023.

6. Internal Revenue Service. “Instructions for Form 2553 (Rev. 12/2022).” Accessed February 22, 2023.