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If you have a business and want to make a quick change that will reduce your tax liabilities, then making a Tennessee S Corporation (S Corp) might be right for you.
Although people commonly wonder if an S Corp is an LLC, it falls into a different category. An S Corporation is simply any business entity (whether an LLC or corporation) that receives different tax treatment from the Internal Revenue Service (IRS). They are not a separate type of business entity from standard corporations or LLCs.
By obtaining different tax treatment from the IRS, a Tennessee S Corporation can “pass-through” revenue and losses to its shareholders for tax purposes. That means that its owners do not have to pay both corporate taxes and personal income taxes. This article focuses on how to form an S Corporation in Tennessee. It will also cover the pros and cons of electing to be a Tennessee S Corporation.
We know that business owners have a lot of different needs and questions. Whatever your needs, we can help you with one of our products or services. Do you want help to start up a business, like a Tennessee Corporation or a Tennessee Limited Liability Company (LLC)? We can help.
There are a few preliminary steps that you’ll need to take before you can create an S Corporation in Tennessee. Specifically, you need to first set up a business. You can pick from various types of business entities, but the two most common business entity types are regular corporations and LLCs.
Before you do anything else, you’ll need an awesome name for your company. So take a few minutes with family, friends, and your business partners to think of some ideas. You can then search Tennessee’s state business name database to check whether any of your potential names are available.
Register Your Business as an S Corp
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Registered agents serve as the critical point of contact for your company when it comes to all legal and financial letters, documents, and correspondence. Consequently, the state requires that all companies have them before they form.
Everyone knows that businesses need managers. Depending on the kind of business, the terminology for your management changes. Corporations have a board of directors that oversee the company. LLCs can either have managers or members.
Once you have a registered agent, a list of management personnel, and a name, you need to complete your business’s Tennessee Corporate Charter or Articles of Organization. The Corporate Charter is for corporations, while an LLC in Tennessee uses Articles of Organization. Both of them require the same basic information, like
Once your business is eligible to request S corp status, there is one filing requirement to take care of. Specifically, to formally elect to obtain S Corp treatment, you’ll need to file a copy of Form 2553 with the IRS.
However, the IRS has a special timing requirement for Form 2553. You must complete and submit your copy of Form 2553 no later than 2 months and 15 days after the beginning of your business’s tax year if you want the S Corp election to take place that year.
If you want the election to come into effect for the next tax year, you can file Form 2553 on any date within the preceding tax year.
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:
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.
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.
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.
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.
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.
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.
Besides the eligibility requirements discussed above, the main requirement for creating an S Corporation is filing a copy of Form 2553.
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.
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.
Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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Start Your S Corp in Tennessee
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There are various benefits that you can enjoy if you elect to make your business a Tennessee S Corp. Specific advantages include pass-through taxation and better self-employment tax treatment.
You’ll pick a business name just before you first create a C corporation or LLC. You can perform a business name search to see if your business’s name is already in use or reserve a business name with us if you’re not ready to form a business yet.
Electing for S Corporation status is not right for all businesses. If you are unsure about whether S Corp status is right for your business, consult a qualified legal or financial advisor. Also, be sure to check out the differences between an LLC and an S Corp.
Take a moment to read our guide on an S Corp’s tax treatment. If you have further questions, consult a certified tax professional.
Tennessee Business Resources
How to File an S Corp in Your State
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