If you’re thinking about ways to save on taxes in the Volunteer State, you might be considering a Tennessee S corp. In this guide, you’ll learn about the pros and cons of having an S corp and how to go about starting one.
An S corporation (S corp) is a tax status that a limited liability company (LLC) or a C corporation (the default form of corporation) can apply for. For an LLC, filing as an S corp may provide savings on self-employment taxes for some business owners. For C corporations, it’s a method of avoiding double taxation.
You can find more detailed information about S corps on our “What Is an S Corporation?” page.
An S corporation, despite what it sounds like, isn’t a business structure in and of itself. It’s a tax classification that either an LLC or a corporation can apply for if it meets the IRS’s criteria. We’ll outline those requirements and the steps you would need to take to file as an S corp if you decide that it’s right for your business.
You must be aware of the S corp filing requirements and limitations before you begin this process. To qualify to be an S corporation, a business entity must:
And so, not all business entities are eligible for S corp election. However, if your business entity meets these criteria, you can apply for an S corp status.
To have a Tennessee S corporation classification, you’ll need to start either an LLC or a C corporation if you haven’t already done so. Then, you’ll file an election form with the Internal Revenue Service (IRS).Ready to file as an S corporation in Tennessee? If so, we’ll walk you through it. We’ll first show you how to form an LLC in Tennessee. If you’d rather form a Tennessee corporation, follow the instructions on our Tennessee corporation page. Then meet us back here in Step 6, where we’ll show you how to file for S corp status as either an LLC or corporation.
Name for your LLC. Brainstorm some LLC names that are memorable and convey what your business sells. Beyond that, though, you need to follow Tennessee’s rules for naming LLCs.
Here are some important guidelines to follow:
For a complete list of LLC naming rules, see T.C.A. § 48-207-101 or T.C.A. § 48-249-106.
How do you know whether your desired business name has already been claimed by someone else? You start by using the business name search engine on the Tennessee Secretary of State website. We show you how in our guide to conducting a Tennessee business name search.
The Tennessee Secretary of State doesn’t check to see whether the name you want to use is trademarked. So, even if they approve your business name, someone else with a federal or state trademark may later challenge your right to use the name in court.
To truly check to see if your business name isn’t trademarked can be difficult because there’s no one central place to check. Some businesses even employ an attorney specializing in trademarks to see if they’re in the clear.
You can take some actions yourself, like searching the trademark database on the U.S. Patent and Trademark Office website. This can help you see if someone’s already claimed a federal trademark on the name you want.
State trademarks are applicable only within the borders of a state. The Tennessee Secretary of State has a trademark search engine on its website where you can see if anyone has a state trademark on your desired LLC name. If you want, you can also apply for your own state trademark on the site.
In addition to checking these databases, it’s wise to do an internet search for your business name, including checking domain names and social media sites.
Even if you don’t sell your products or services directly online, you’re going to want a presence on the web. After all, you want your company’s name, address, and contact info to pop up when potential clients search for it.
That’s why getting a good domain name that pairs well with your business name is so important. You’re likely going to be putting that URL on your business cards and other marketing materials, and you want people to be able to remember it and associate it with your business.
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Name a registered agent for your LLC. A Tennessee registered agent is an individual or business entity that receives legal notices (like service of process) and certain official government correspondence involving your company.
Tennessee law requires all LLCs to have a registered agent with a registered office where they will be available to receive notices in person. The registered office may be the same as any of the LLC’s places of business, but it doesn’t have to be (T.C.A. § 48-249-109(a)(1)).
The registered agent may be:
Note that the registered office must be a physical street address, so you can’t use a P.O. box or something similar. The registered agent must also be available during regular business hours.
Some business owners prefer to be their own registered agent, but there are disadvantages to this. You must constantly be available during normal business hours at that physical address, which isn’t always convenient or possible. It’s also embarrassing and bad for business to be served with a lawsuit in front of customers.This is where a registered agent service like ours can help. We can put you in contact with our commercial registered agent partners in Tennessee. This registered agent service allows you the peace of mind of knowing you are legally compliant while keeping certain matters discreet.
Submit your Tennessee Articles of Organization. Once approved, this will officially register your Tennessee LLC in the eyes of the state.
To file with the Tennessee Secretary of State, you’ll need to make key information about your business ready and available. Make sure your chosen name has been researched and cleared. Double-check that you have all the contact information for your members and registered agent handy. The Tennessee Secretary of State accepts filings online, by postal mail, and by hand delivery, along with the relevant filing fee.
The Tennessee Articles of Organization form asks for the following information. Be aware that this information becomes available to be searched in public records once submitted.
You can apply online via the Tennessee Secretary of State website or print the paper form and mail it to:
Department of State
312 Rosa L. Parks Ave.
6th Floor, William R. Snodgrass Tower
Nashville, TN 37243
If you’re having trouble doing this by yourself or don’t have the time, that’s okay! Filing official government documents to the Tennessee Secretary of State can be intimidating and complicated. With our business formation plans, we can handle it for you to make sure it’s done quickly and correctly.
Creating an LLC operating agreement is the next step. While it’s not a legal requirement to have a Tennessee operating agreement, it’s very wise to have one.
An operating agreement (OA) clearly defines the terms of ownership and management for an LLC. And, without one, you’ll be subject to Tennessee’s default rules for LLCs, which might not reflect the wants of yourself and the other members.
Here are some of the benefits an OA offers to owners of an LLC:
Here are some basic items you may want to include in your OA:
Feeling unsure as to how to create an operating agreement for your LLC? We offer a customizable template to help get you started.
Get an Employer ID Number (EIN) from the IRS. An EIN is a nine-digit number that acts like your business’s Social Security number. A federal EIN can be used to open a bank account, hire employees, and pay taxes.
You get a Federal EIN by applying with the IRS. You can do this online or by mailing in a form. Note that if you file online with the IRS, you must complete the process in one sitting. The IRS cautions that you can’t save the form and go back later. Make sure you have all your business’s information ready when you file to save time.
If you’d rather deal with the IRS as little as possible, we can get your Employer Identification Number for you. Our EIN service is quick and eliminates the hassle.
You’ll also have to register to pay state taxes. The Tennessee Department of Revenue has an online system called the Tennessee Taxpayer Access Point (TNTAP) in which you can register for the following taxes:
Not all Tennessee taxes can be registered online, such as the automobile rental surcharge tax, tire fee, and used motor oil taxes. See the Tennessee Department of Revenue website for instructions on how to register for these taxes with paper applications.
Submit the application for S corp status. Once your LLC or C corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status.
The IRS requires that you complete and file your Form 2553:
For LLCs wishing to file as an S corp, please note: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
All of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.
While S corp classification does come with benefits for some businesses, making this election might not be right for all companies. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward. It’s always wise to consult a tax professional about whether the S corp election would be best for your business.
The advantages of filing as an S corp for an LLC differ from those for filing as a C corporation. Let’s look at the advantages for LLCs first.
A typical LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. Let’s explain how it could provide tax benefits for certain LLCs.
The members of a standard LLC are considered self-employed. They receive money from the business through their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay half of them.
But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee of the LLC. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Note that money paid out as salary is a tax-deductible expense for the business.
One catch to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of 16 bucks and avoid contributing anything to Social Security and Medicare.
So, what is “reasonable compensation” in the eyes of the IRS? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t completely defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning.
If the IRS doesn’t find your salary to be reasonable, it has the authority to reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.
Having an LLC with S corp status can have some drawbacks over a standard LLC:
As we listed above, S corps have more qualifications than a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.
Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS monitors LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, S corp owners may want to observe some of the same formalities that C corporations do (such as regular meetings and extensive record keeping), even if they’re not legally required to.
Having an LLC filing as an S corporation generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, as well.
With these added complexities, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.
If you have a C corporation, filing as an S corp has notable advantages:
One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are distributed to the individual shareholders as dividends, they’re taxed a second time on the shareholders’ personal tax returns.
But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual business owner level. The company itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.
We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as big of a deal as they were.
Just as business profits pass through to the owners of an S corp, so do the losses. Unlike C corporation shareholders, S corp owners can write off the company’s losses on their personal income statements.
This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. However, make sure you’re aware of the IRS’s shareholder loss limitations.
Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income (“QBI” for short). This deduction isn’t available to C corporation shareholders.
QBI is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that may reduce your QBI if exceeded (see the IRS website for details).
S corp status also has its drawbacks:
An S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand beyond the U.S. You also can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.
One way corporations attract investors is to offer preferred stock, but the IRS doesn’t allow it for S corps.
Because of the restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.
Again, it’s important to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings.
In an S corp, the business itself doesn’t usually pay federal income taxes. But what about state income taxes?
Tennessee doesn’t recognize S corp status at the state level, meaning that your S corp will be treated like a C corporation for state tax purposes. Just like C corporations, S corporations must pay a 6.5% excise tax in addition to a franchise tax, which is equal to the greater of $0.25 for each $100 of net worth or actual value of tangible property, but no less than $100. However, Tennessee has no personal income tax.
Forming a business can be challenging, but we’re here to make it as easy for you as possible.
When you’re ready to launch your dream business, we can help you form a Tennessee LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward. Contact us today to get started.
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For corporations, a major advantage is being able to avoid double taxation. Usually, a C corporation’s profits are taxed at both the business and individual shareholder level, while an S corp’s profits are taxed only on the individual level.
For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay employment taxes (Social Security and Medicare) on their salary and not the profits they receive. For some LLCs, this can add up to substantial tax savings.
Your S corp status doesn’t affect the naming process for your Tennessee corporation or LLC. Whether you file to be taxed as an S corp or not, your business remains an LLC or a corporation and follows the same Tennessee business naming rules.
Before formally registering a business name, you should first search the Tennessee business entity records to make sure that you don’t select one that’s already in use by another business. That aside, however, you can typically name your Tennessee S corporation nearly anything you want as long as you comply with any applicable state naming regulations.
S corp status may not be ideal for all businesses. If you’re not sure whether to identify your LLC as an S corp or keep the default status, be sure to consult with an experienced business law attorney or accountant in your state.
Calculating taxes isn’t always easy, but you can check out our S corp tax guide to learn more about navigating taxes for your Tennessee S corporation. A certified tax professional can give you more definitive information for your circumstances.
Sorry, but right now our S corp service is only for applying for S corp status when you form your LLC with us. We do offer other services to support your business, though.
According to information on the IRS website, you’ll be notified of whether or not your S corp election is accepted within 60 days of filing Form 2553.
If you’re a new LLC, you have to apply for S corp status within 75 days of the formation of your LLC or no more than 75 days after the beginning of the tax year in which the election is to take effect. For an existing business, you would file at any time during the tax year preceding the tax year it is to take effect.
An LLC is a separate legal business entity, whereas an S corp is a tax filing status for an LLC or corporation. You can read more on our LLC vs. S Corp page.
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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