LLC vs S-Corp | What Entrepreneurs Need to Know in Tennessee

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LLC vs S-Corp in Tennessee

When starting a small business in the Tennessee, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Tennessee. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Tennessee. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Tennessee

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Tennessee?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Tennessee?

Unlike a limited liability company (LLC) or other business structures, Tennessee S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Tennessee

Creating a business in Tennessee requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Tennessee Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Tennessee does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Tennessee.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Tennessee

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Tennessee is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Tennessee. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Tennessee are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Tennessee are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Tennessee to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Tennessee with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Tennessee State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Tennessee, it costs $50 per member, which can be paid to the TX Comptroller. Of course, before forming the whole LLC, you must pay the initial fee of $300 to the Tennessee Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Tennessee have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Tennessee LLC: An LLC can have any number of owners, called members, from starting Tennessee Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Tennessee S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Tennessee LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Tennessee.

Tennessee S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Tennessee LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Tennessee S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Tennessee LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Tennessee Operating Agreement.

Tennessee S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Tennessee LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Tennessee: LLC or S-Corp?

Filing an LLC or S-Corporation in Tennessee requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Tennessee, you must submit the Articles of Organization to the Tennessee Secretary of State. Your Articles of Organization must include information about your Tennessee LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Tennessee S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Tennessee: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Tennessee depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Tennessee LLC Cost for detailed information.

Tennessee S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Tennessee LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Tennessee?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Tennessee. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in Tennessee.

FAQs

What is an LLC in Tennessee?
An LLC, or limited liability company, is a type of business entity that provides owners with limited liability protection for their personal assets.
What is an S-Corp in Tennessee?
An S-Corp, or S corporation, is a business entity that is taxed similarly to a partnership but also provides owners with limited liability protection.
What are the advantages of forming an LLC in Tennessee?
The advantages can include reduced legal liability, tax benefits, and improved credibility with other companies.
What are the advantages of forming an S-Corp in Tennessee?
The advantages of forming an S-Corp include a simplified tax structure and limited liability protection.
How do I form an LLC in Tennessee?
To form an LLC in Tennessee, file Articles of Organization with the Tennessee Secretary of State.
How do I form an S-Corp in Tennessee?
To form an S-Corp in Tennessee, you’ll need to file Articles of Incorporation with the Tennessee Secretary of State.
What are the fees associated with forming an LLC in Tennessee?
The fee to form an LLC in Tennessee is $300.
What are the fees associated with forming an S-Corp in Tennessee?
To form an S-Corp in Tennessee, there is a $100 filing fee.
What is the tax treatment of an LLC in Tennessee?
LLCs are generally treated as pass-through entities for tax purposes, meaning that the income is reported on the owner’s personal tax returns.
What is the tax treatment of an S-Corp in Tennessee?
Like an LLC, an S-Corp’s income is usually treated as pass-through income for tax purposes.
How many owners can an LLC have in Tennessee?
LLCs in Tennessee may have an unlimited number of owners.
How many owners can an S-Corp have in Tennessee?
S-Corps in Tennessee cannot have more than 100 owners.
How flexible is an LLC in Tennessee compared to an S-Corp?
LLCs are generally more flexible and have less formal requirements than S-Corps.
Can an LLC elect to be taxed like an S-Corp in Tennessee?
Yes, LLCs can elect to be taxed as an S-Corp in Tennessee if they meet certain qualifications.
What should I consider when choosing between an LLC and an S-Corp in Tennessee?
Factors to consider include the number of owners, tax treatment, flexibility, and overall cost.
What kind of liability protection does an LLC offer in Tennessee?
An LLC in Tennessee provides limited personal liability protection for its owners against legal actions related to the business.
What kind of liability protection does an S-Corp offer in Tennessee?
S-Corps in Tennessee offer limited liability protection for their owners as well.
Can an LLC operate across state lines in Tennessee?
Yes, an LLC can operate across state lines, and it will be considered a foreign LLC in any states other than Tennessee where it plans to do business.
Can an S-Corp operate across state lines in Tennessee?
Yes, an S-Corp can operate across state lines, but it will need to be registered as a foreign corporation in any states it operates in.
How easy is it to convert an LLC to an S-Corp in Tennessee?
Converting an LLC to an S-Corp in Tennessee involves filing IRS Form 8832, but there are other legal and tax considerations to think about.
How easy is it to convert an S-Corp to an LLC in Tennessee?
Similar to converting an LLC to an S-Corp, converting an S-Corp to an LLC in Tennessee involves consulting with an attorney and possibly filing a formal modification with the state.
Are there any annual reporting requirements for LLCs in Tennessee?
LLCs in Tennessee must file an annual report with the Tennessee Secretary of State and pay an annual fee.
Are there any annual reporting requirements for S-Corps in Tennessee?
S-Corps in Tennessee do not have an annual report requirement.
What is the minimum tax a Tennessee LLC must pay?
There is a minimum tax of $175 that a Tennessee LLC must pay, even if no income was earned during the year.
What is the minimum tax a Tennessee S-Corp must pay?
There is no minimum tax for S-Corps in Tennessee.
What are the differences in management structures between LLCs and S-Corps in Tennessee?
LLCs may be managed by either the owners themselves or outside managers, while S-Corps are managed by a board of directors.
Can LLC owners in Tennessee pass ownership to family members without affecting the entity’s tax status?
Yes, LLC owners in Tennessee can pass ownership to family members and still maintain the same tax status.
Can S-Corp owners in Tennessee pass ownership to family members without affecting the entity’s tax status?
Yes, S-Corp owners in Tennessee can pass ownership to family members without affecting the entity’s tax status.
Which is better in Tennessee, LLC or S-Corp?
The choice between LLC and S-Corp in Tennessee depends on various factors such as taxation, management structure, and ownership restrictions.
How to set up an LLC in Tennessee?
To set up an LLC in Tennessee, you need to file Articles of Organization with the Tennessee Secretary of State and pay the necessary fees.
How to set up an S-Corp in Tennessee?
To set up an S-Corp in Tennessee, you need to form a corporation, elect S-Corp status with the IRS, and file the necessary documents with the Tennessee Secretary of State.
Is an LLC or S-Corp taxed as a partnership in Tennessee?
Yes, both LLC and S-Corp can elect to be taxed as a partnership in Tennessee to receive pass-through tax treatment.
What is the Tennessee franchise tax for LLCs?
The Tennessee franchise tax for LLCs is calculated as $0.25 per $100 of the greater of the owner’s equity or tangible property value.
What is the Tennessee franchise tax for S-Corps?
The Tennessee franchise tax for S-Corps is calculated as $0.25 per $100 of the greater of the owner’s equity or tangible property value.
Can an LLC convert to an S-Corp in Tennessee?
Yes, an LLC can convert to an S-Corp in Tennessee by filing a Form 2553 with the IRS and meeting the eligibility criteria.
Can an S-Corp convert to an LLC in Tennessee?
Yes, an S-Corp can convert to an LLC in Tennessee by filing the necessary documents with the Tennessee Secretary of State and IRS.
Are individuals allowed to own an S-Corp in Tennessee?
Individuals are allowed to own an S-Corp in Tennessee, but there are restrictions on the number and type of shareholders.
Are foreign individuals allowed to own an LLC or S-Corp in Tennessee?
Yes, foreign individuals are allowed to own an LLC or S-Corp in Tennessee but need to comply with additional registration and tax requirements.
What are the annual fees for an LLC in Tennessee?
The annual fee for an LLC in Tennessee is $300.
What are the annual fees for an S-Corp in Tennessee?
The annual fee for an S-Corp in Tennessee is $60.
Are there any residency requirements for LLC or S-Corp owners in Tennessee?
There are no residency requirements for LLC or S-Corp owners in Tennessee.
What types of businesses are eligible for S-Corp status in Tennessee?
Generally, all types of businesses that meet the eligibility criteria can opt for S-Corp status in Tennessee, but some industries such as banking and insurance are excluded.
Can an LLC elect to be taxed as an S-Corp in Tennessee?
Yes, an LLC can elect to be taxed as an S-Corp in Tennessee by filing Form 8832 and Form 2553 with the IRS.
What is the corporate income tax rate in Tennessee?
Tennessee does not have a corporate income tax for LLC or S-Corp; instead, it levies the franchise tax.
Are Texas LLCs and S-Corps required to file annual reports in Tennessee?
Yes, LLCs and S-Corps registered in Tennessee must file the Annual Report with the State of Tennessee by the due date every year.
What happens if an LLC or S-Corp fails to pay the Tennessee franchise tax?
If an LLC or S-Corp fails to pay the Tennessee franchise tax, it may face penalties, interest, and other legal actions.
Can executives or officers of an LLC or S-Corp be held personally liable in Tennessee?
In some situations, executives or officers of an LLC or S-corp in Tennessee can be held personally liable for debts or wrongful actions.
Can owners of LLC or S-Corp in Tennessee deduct their healthcare expenses?
Yes, owners of LLC or S-Corp in Tennessee can deduct their healthcare expenses under certain conditions.
What documents are required while forming an LLC in Tennessee?
While forming an LLC in Tennessee, you need to file the Articles of Organization, Operating Agreement, and Certificate of Publication (if required).
What is the process to dissolve an LLC in Tennessee?
The process to dissolve an LLC in Tennessee involves filing articles of dissolution with the Tennessee Secretary of State and IRS.
What is the process to dissolve an S-Corp in Tennessee?
The process to dissolve an S-Corp in Tennessee involves filing articles of dissolution with the Tennessee Secretary of State and IRS.
Can an LLC or S-Corp limit the transfer of ownership in Tennessee?
Yes, an LLC or S-Corp in Tennessee can limit the transfer of ownership through restrictions mentioned in its Operating Agreement or Bylaws.
Are LLCs and S-Corps eligible for state tax credits in Tennessee?
Yes, LLCs and S-Corps in Tennessee are eligible for various state tax credits such as credits for job creation, investment, and more.
What is the process to add or remove members of an LLC in Tennessee?
The process to add or remove members of an LLC in Tennessee involves amending the Operating Agreement, updating the state records, and ensuring compliance with all necessary procedures.
What is the process to add or remove shareholders of an S-Corp in Tennessee?
The process to add or remove shareholders of an S-Corp in Tennessee involves issuing or repurchase of stocks, updating the state records, and ensuring compliance with all necessary procedures.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Tennessee will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Tennessee and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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