How to Start an S-Corporation in Tennessee (2024 Guide)

Start an S-Corporation in Tennessee

If you want to start an LLC in Tennessee, there are things that you should consider. Tennessee is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Tennessee, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Tennessee if qualified for the limitations and requirements.

Recommended: We recommend a professional service that can launch an S-Corp whether you have plans to crowdfund or go public. We recommend using –

LegalZoom Starts at $149 + filing fees

How to Form an S-Corporation in Tennessee?

To create S-Corp in Tennessee, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Articles of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Tennessee

After you have decided on the idea to start an S-Corp in Tennessee, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Tennessee Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Tennessee.
  • Limit of restricted words that need a license in Tennessee
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in Tennessee is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in Tennessee.

However, if you would like to have an easier process in filing the necessary documents, you can get Tennessee Registered Agent Services.

We reviewed some of the Best Registered Agent Services and provided features as an add-on with their packages for you to check out.

LLC Service

Rating & Pricing

Top Features

Learn More

#1 Recommendation

$299 Per Year

  • Free LLC Formation

  • RA service in all states

  • Legal consultation

$125 Per Year

  • Flat price for RA service

  • LLC formation package

  • Fast service

Step 3: File For Articles of Organization

The Articles of Organization is an important document to start your limited liability company (LLC). Tennessee Articles of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Articles of Organization to be filed in TX Comptroller, you need to pay a filing fee of $300. In Tennessee, the filing fee of forming an LLC is $300.

Recommended: Filing formation papers is easy and hassle-free if you hire a professional service. We recommend using –

LegalZoom ($0 + State Fee)

Step 4: Creating an Operating Agreement

After you have filed your Articles of Organization, the next step is to create an operating agreement in Tennessee. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Tennessee can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

If you would like to be assisted in getting an EIN in the Internal Revenue Service, LegalZoom can get your EIN for you. Their EIN service is quick and hassle-free. For more details about EIN for your business, check on how to apply for an EIN in Tennessee.

Recommended: With LegalZoom’s EIN service, obtaining your business’s crucial tax ID becomes a breeze, saving you time and effort by handling the complexities so you can quickly set sail on your entrepreneurial voyage. We recommend –

LegalZoom$79 (Standard Fee)

Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Articles of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Tennessee, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Tennessee, including:

  1. Filing Fees: When forming a corporation in Tennessee, you must file Charter for Profit Corporation with the Tennessee Secretary of State and pay a filing fee of $100 for online and by mail filing.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Tennessee are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Tennessee General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Tennessee are subject to the annual franchise tax, which can financially burden some businesses.

In an Tennessee S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Tennessee franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-Corporation in Tennessee?
An S-Corporation in Tennessee is a classification status for your business where business owners pass the income, losses, deductions, and credit through shareholders and pay income taxes on their individual tax returns.
Why should I form an S-Corporation in Tennessee?
You should form an S-Corporation in Tennessee to separate your business liabilities from your personal assets by not being personally liable, have less corporate taxes than a typical C-Corporation, and pass on profits and losses to the shareholders.
How do I start an S-Corporation in Tennessee?
You start an S-Corporation in Tennessee by filing articles of incorporation with the Secretary of State’s office, registering for Tennessee state tax accounts, and acquiring any licenses or permits your business needs.
What documents do I need to file to start an S-Corporation in Tennessee?
To start an S-Corporation in Tennessee, you will need to file the articles of incorporation, complete all state registration requirements and get an EIN number.
How much does it cost to start an S-Corporation in Tennessee?
The cost of starting an S-Corporation in Tennessee depends on the registration filed forms and the lawyer charges fees.
What taxes does an S-Corporation in Tennessee have to pay?
An S-Corporation in Tennessee generally only pays taxes on the profits earned through the individual salaries and shared distributions to shareholders.
How many shareholders can an S-Corporation have in Tennessee?
An S-Corporation in Tennessee can have up to 100 shareholders.
Are there any residency requirements to form an S-Corporation in Tennessee?
There are no residency requirements to form an S-Corporation in Tennessee.
Does a registered agent need to be a Tennessee resident to form an S-Corporation in Tennessee?
No, a registered agent does not need to be a Tennessee resident to form an S-Corporation in Tennessee.
Can an S-Corporation in Tennessee have foreign shareholders?
Yes, an S-Corporation in Tennessee can have foreign shareholders.
What is the benefit of adding my small business into an S-Corporation in Tennessee?
The benefit of adding a small business into an S-Corporation status in Tennessee is that you can separate owner’s and business liabilities while offering fewer taxes proportional to profits earned.
Can an S-Corporation in Tennessee receive SBA loans?
Yes, an S-Corporation in Tennessee can receive SBA loans.
Do I have to file a state tax return for my S-Corporation in Tennessee?
Yes, you have to file a state tax return for your S-Corporation in Tennessee for tax purposes.
What is the main differences setting an S-Corporation up from setting up an LLC in Tennessee?
The main differences are that an S-Corporation passes profits and losses through to business owners’ personal tax return, limits owner’s liability, and follows more strict ownership requirements compared to LLCs.
Do all TN small businesses qualify to become S-Corporations?
Not all small business owners are eligible for S-Corporation status in Tennessee. To qualify, your business must meet the requirements set by Tennessee law publications.
Do S-Corporations in Nashville need a City Business License?
Yes, S-Corporations in Nashville need a City Business License.
How long does it take to state register-s for status as an S-Corporation in Tennessee?
The process typically takes 2-4 weeks to register as an S-Corporation in Tennessee.
Is Tennessee state corporate law differing in terms of S-Corporations against c-Corporations?
The State of Tennessee Corporate Law conforms to providing the advantage of different tax set-up and legal protections between an S-Corporation and C-Corporation.
Whom do I have to inform before starting my S-Corporation in Tennessee?
You have to inform the IRS and Tennessee State Secretary of State.
What is the duration of S-Corp status retained in TN?
There is no time-period for S-Corp status in TN.
How can an LLC convert to an S-Corporation status in TN?
To convert to an S-Corporation, you will have to give written consent by each LLC member, along with a complied request letter of changing your tax status to an S-Corporation to the IRS.
Can a non-profit organization become an S-Corporation in Tennessee?
No, A non-profit organization can not become an S-Corporation in Tennessee.
How often is the annual tax period in TN for S-Corporations?
The annual tax period in TN for S-Corporations is based on the calendar year, and the deadline is on the federal tax filing deadline every year, April 15.
When is the last date taxpayers can repeat income with an S-Corp position in TN?
If you file an S-Corp status in TN, you need to follow instructions provided by the concerned authorities for S-Corporation revert income adjustment.
Is workman’s compensation mandatory for an S-Corporation in TN?
Workman’s compensation, including Disability and Federal Unemployment Tax, in Tennessee, is mandatory for every S-Corporation in all aspects.
When can’t own doesn’t need a Tennessee franchise tax return for an S-Corporation?
Tennessee S-Corporations do have to indicate their dividends received on their company tax returns at times to determine if they needs to file a franchise tax return.
What other business certificates do I require after submit state Secretary of State filing?
Make sure your new Tennessee-based S-Corp is registered with the Tennessee department of revenue, LLLTE, workers compensation insurance, and business insurance.
Have to advertise initial S-Corp registration notices in the newspaper as compared to a c-Corp in TN?
There is no Such thing claim or notification to advertise for an S-Corp registration or c-Corp registration filed in the Secretary of State Department.
What is an S-corporation?
An S-corporation is a type of corporate structure that provides the benefits of incorporation while avoiding double taxation.
How is an S-corporation taxed in Tennessee?
In Tennessee, S-corporation earnings are taxed at both the state and federal levels as ordinary income.
Can a single-member LLC be taxed as an S-corporation in Tennessee?
In Tennessee, a single-member LLC can elect to be taxed as an S-corporation to minimize self-employment taxes.
How do I form an S-corporation in Tennessee?
To form an S-corporation in Tennessee, you must file articles of incorporation with the Tennessee Secretary of State.
What documents do I need to form an S-corporation in Tennessee?
To form an S-corporation in Tennessee, you will need to provide articles of incorporation, corporate bylaws, and a shareholder agreement.
How much does it cost to form an S-corporation in Tennessee?
The filing fee for articles of incorporation in Tennessee is currently $100.
How many shareholders can an S-corporation have in Tennessee?
An S-corporation in Tennessee is limited to a maximum of 100 shareholders.
Can a Tennessee S-corporation own shares in another corporation?
Yes, a Tennessee S-corporation can own shares in another corporation.
Can I have a federal S-corporation election but not a Tennessee S-corporation election?
No, if you make a federal S-corporation election, Tennessee taxes will apply as if you had made a Tennessee S-corporation election.
How long does it take to set up an S-corporation in Tennessee?
It typically takes 7-10 business days to set up an S-corporation in Tennessee.
What is the difference between an S-corporation and a C-corporation in Tennessee?
The primary difference between an S-corporation and a C-corporation in Tennessee is that an S-corporation isn’t taxed at the corporate level.
Do I need to hire an attorney to form an S-corporation in Tennessee?
While it’s not required, many people choose to hire an attorney to ensure they meet all the legal requirements to form an S-corporation in Tennessee.
What is the advantage of forming an S-corporation over a sole proprietorship in Tennessee?
The primary advantage of forming an S-corporation in Tennessee is that it shields the personal assets of shareholders from the debts and liabilities of the corporation.
Can an S-corporation be a nonprofit in Tennessee?
No, a nonprofit cannot be an S-corporation in Tennessee.
Can an S-corporation in Tennessee issue more than one class of stock?
No, an S-corporation in Tennessee can only issue one class of stock.
What happens if a Tennessee S-corporation loses its status?
If a Tennessee S-corporation loses its status, it must pay taxes on its income at the corporate level.
Who decides how much to pay Tennessee S-corporation shareholders?
The amount that shareholders are paid in a Tennessee S-corporation is determined by the corporation’s bylaws.
Are officers and directors of an S-corporation in Tennessee considered employees?
Yes, officers and directors of a Tennessee S-corporation are considered employees.
What is the difference between an S-corporation and an LLC in Tennessee?
An S-corporation shields personal assets from the debts and liabilities of the corporation, while an LLC in Tennessee shields personal assets from liability but not from taxation.
How often must Tennessee S-corporation shareholders hold meetings?
Tennessee S-corporation shareholders must hold annual meetings.
Can Tennessee S-corporation shareholders participate in management of the corporation?
Yes, Tennessee S-corporation shareholders can participate in the management of the corporation.
Are Tennessee S-corporation shareholders personally liable for the corporation’s debts?
No, Tennessee S-corporation shareholders are not personally liable for the corporation’s debts.
Do Tennessee S-corporation shareholders have limited liability?
Yes, Tennessee S-corporation shareholders have limited liability.
What actions can cause a Tennessee S-corporation to lose its status?
Disqualifying actions such as issuing multiple classes of stock or having more than 100 shareholders can cause a Tennessee S-corporation to lose its status.
Can I change a Tennessee LLC into an S-corporation?
Yes, a Tennessee LLC with multiple members can elect to be taxed as an S-corporation.
Can a Tennessee S-corporation deduct its own expenses on its tax returns?
Yes, a Tennessee S-corporation can deduct its own expenses on its tax returns.
What is required to maintain an S-corporation in Tennessee?
Steps to maintain a Tennessee S-corporation include regular holding of shareholder meetings, maintenance of books and records, and filing annual reports with the Tennessee Secretary of State.

Also Read

Why You Should Start Tennessee S Corp

First and foremost, operating your business as an S Corporation can provide significant tax advantages. Unlike a traditional C Corporation, an S Corporation is a pass-through entity, which means that profits and losses are passed through to the shareholders and reported on their personal income tax returns. This can result in substantial tax savings, as the business itself does not pay federal income tax at the corporate level.

In addition to potential tax savings, forming an S Corporation can also offer legal protection for business owners. By establishing a separate legal entity, such as an S Corporation, entrepreneurs can shield their personal assets from business liabilities, reducing their risk exposure in the event of a lawsuit or other legal action. This can provide peace of mind and protect your hard-earned assets in the long run.

Furthermore, operating as an S Corporation can enhance your credibility as a business owner. This legal structure can help to establish a more professional image for your company, which can be particularly important when seeking financing, signing contracts, or attracting new customers. By demonstrating that you have taken the necessary steps to formalize your business, you can instill confidence in potential stakeholders and position your company for success.

Another compelling reason to consider starting a Tennessee S Corporation is the flexibility it offers in terms of ownership and management. Unlike a traditional C Corporation, which must adhere to strict ownership and governance requirements, an S Corporation allows for greater flexibility in structuring ownership, management, and shareholder rights. This can be particularly advantageous for small businesses and startups looking to maintain control and autonomy over their operations.

In conclusion, while starting a Tennessee S Corporation may require careful planning and adherence to legal requirements, the potential benefits far outweigh the challenges. From tax advantages and liability protection to enhanced credibility and flexibility, operating as an S Corporation can provide a solid foundation for your business growth and success. Whether you are a sole proprietor, a small business owner, or an entrepreneur with big dreams, starting a Tennessee S Corporation may be a strategic decision worth considering.

Conclusion

Forming an S-Corporation in Tennessee can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

Leave a Comment