Start a Tennessee S Corp

Requirements and limitations of S Corporations

Now that you know the basics of an S Corporation, you should be aware of the Tennessee S Corp filing requirements. To qualify for S Corporation, your business must:

• Have no more than 100 shareholders
• Be a domestic business
• Have only one class of stock
• Not be an ineligible type of corporation, such as certain financial institutions and insurance companies. 

The last requirement for an S Corporation relates to the types of shareholders it can have. An S corporation can only have shareholders that are estates, individuals, and certain trusts. The S Corp status is not allowed if any shareholders are corporations, partnerships, or non-resident immigrants. 

Weighing the pros and cons of creating an S Corporation

The decision to form a Tennessee S Corp is a big one. And while there are many advantages to S Corp status, there are several disadvantages too.

Pros

• Ability to use cash method of accounting
• Tax-favorable income characterization
• Pass-through taxation
• Enhanced asset protection

Cons

• Higher creation and maintenance costs
• Closer scrutiny from the IRS
• Restrictions on stock issuance and ownership
• Minimal flexibility on allocating losses and income

Not all businesses should be S Corps. Determining whether S Corp status is ideal varies from one business to the next. Therefore, you should carefully weigh your business‘s needs and seek professional legal and financial advice before making the call.

What to know before creating an S Corporation in Tennessee

Your corporation or LLC will be treated by default as a C Corporation after it’s formed. But before you decide to change your corporation status to an S Corp, you should be aware of a few key facts. 

What is an S Corporation?

S Corporations tend to be small corporations or LLCs that enjoy better tax treatment in exchange for extra scrutiny from the IRS and limitations on the number and type of shareholders. 

What’s the difference between an S Corporation and a C Corporation?

As we mentioned earlier, S Corporations are simply companies that are treated differently by the IRS. Specifically, the IRS evaluates these businesses using Subchapter S of the Internal Revenue Code, which is why they are called “S Corporations.” Under Subchapter S, a Tennessee S Corporation can “pass-through” its revenue and losses to its shareholders for tax purposes.

By contrast, C corporations have to pay corporate taxes on the business’s income, and its shareholders have to pay personal income taxes on their earnings. This tax treatment is often called “double taxation.” Because qualified Subchapter S corporations “pass-through” their incomes to their shareholders without paying corporate taxes, they avoid double taxation. An S-Corp’s “tax rate” then depends on its shareholders’ personal tax brackets. 

Like C Corporations, S corporations can issue stock, have shareholders, and provide protection for their owners’ personal assets. That said, there are limitations on stock ownership, as mentioned above. 

What are the requirements to create an S Corporation?

Besides the eligibility requirements discussed above, the main requirement for creating an S Corporation is filing a copy of Form 2553.

Can LLCs choose an S Corporation election?

LLCs can certainly decide to become a qualified subchapter S corporation. That said, the tax benefits for LLCs will be different compared to C Corps. The primary benefit for LLCs is that they receive more favorable self-employment tax treatment when they elect to be an S Corp in Tennessee. If you want to learn more, check out our article on LLC taxes.  

How We Can Help 

Running a business is a daily journey that requires 100% of your effort. Deciding whether to form an S Corporation is just one of the various corporate-level decisions you have to make as a business owner. Although it can feel overwhelming to make major business decisions at times, don’t worry. We’re ready to help you with whatever you and your business need. Get started today.