How to Start an S Corp in Tennessee
Starting a business in Tennessee can provide you with a number of benefits — from tax savings and a low cost of living to an ideal location with a robust business environment. Structuring your business as an S corporation (S corp) in Tennessee could result in significant savings at tax time. Whether you plan to serve the manufacturing industry, open a restaurant, or start another type of company, electing S corp status for your business can prove beneficial.
This guide will walk you through the steps required to start an S corp in Tennessee and provide tips on how to remain compliant as long as you’re in business.
Not in Tennessee? Check out our other How to Start an S Corp guides to learn more.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
Factors to Consider Before Starting an S Corp in Tennessee
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Tennessee S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
To learn more about the tax advantages of an S corp, read our LLC vs. S corp guide and take a look at our S Corp tax calculator.
For a Free Consultation with a Tax Professional
How to Form a Tennessee S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Tennessee
Starting a Tennessee LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Northwest to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Tennessee.
Be sure to choose a name that complies with Tennessee naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Tennessee LLC:
- Your name must include the phrase “limited liability company,” one of its abbreviations (LLC or L.L.C.), or words or abbreviations of the same meaning in a different language.
- Your name cannot contain the word "corporation" or "incorporated" or an abbreviation of either.
- Your name cannot falsely imply that your LLC is organized as, affiliated with, or sponsored by any fraternal, veterans', service, religious, charitable, or professional organization.
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Certain restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual to be part of your LLC.
- Your name cannot imply that the LLC is organized for any unlawful purpose or one not outlined in its Articles of Organization.
- Your name must be distinguishable from any existing business in the state. This includes Tennessee reserved names.
You can also read the Tennessee state statute about LLC naming guidelines for more information.
2. Is the name available in Tennessee? You can use the taxable entity search on the Tennessee Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Step 2: Choose Your Tennessee Registered Agent
You must elect a registered agent for your Tennessee LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Tennessee LLC Articles of Organization
The Tennessee Articles of Organization is used to officially register an LLC. The minimum filing fee is $300, then it is $50 per member with a maximum of $3,000.
File Your Tennessee Articles of Organization
OPTION 1: File Online With the Tennessee Secretary of State
File Online- OR -
OPTION 2: File Form SS-4270 by Mail or In Person
Download FormState Filing Cost: $300+, payable to the Tennessee Secretary of State (Nonrefundable)
Filing Address:
Secretary of State
6th floor - Snodgrass Tower
ATTN: Corporate Filing
312 Rosa L. Parks Ave.
Nashville, TN 37243
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Tennessee LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Tennessee S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Tennessee S Corp Compliant
After you create your Tennessee S corp, you’ll need to focus on ensuring your business remains compliant by following state and local laws and guidelines. Tennessee requires all businesses to keep up to date with taxes and file an annual report each year.
Tennessee S Corp Annual Report
While your business may be taxed as an S corp, it’ll still function as an LLC. Tennessee requires all LLCs and corporations to file an annual report with the Tennessee Secretary of State. This report is due on or before the first day of the fourth month following your business’s fiscal year-end.
Visit our Tennessee Annual Report guide for a step-by-step overview of the filing process.
Tennessee S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Tennessee S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Tennessee Income Taxes
Tennessee is one of nine states with no state income tax. This means you can keep more of your earnings at tax time, allowing you to reinvest more into your business to fuel its growth. With many states imposing an income tax rate as high as 10%, Tennessee has a strong reputation as a business-friendly state.
Tennessee Sales and Use Tax
Tennessee has a sales and use tax rate that includes both a state and local percentage. The state sales and use tax percentage is 7% while the local percentage varies by county or city. To learn more about your area’s sales and use tax rates, visit the Tennessee Department of Revenue website.
Additional State Taxes
The Tennessee Department of Revenue provides information on state-specific taxes that apply to some businesses. Examples of these additional taxes include:
- Alcoholic Beverage Tax
- Consumer Use Tax
- Local Occupancy Tax
- Motor Fuels Tax
- Severance Tax
Visit the Tennessee Department of Revenue website for more information.
Tennessee Local Taxes
Each local municipality in Tennessee may impose its own taxes that may apply to your business. Visit your local government’s website to ensure your business complies with local and state laws.
Start a Tennessee S Corp FAQ
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
In order to qualify for the S corp tax designation, your business must meet the basic requirements set by the IRS. S corps can exist within many different industries in Tennessee, including the healthcare, restaurant, agriculture, and manufacturing industries.
Forming an S corp in Tennessee can benefit you and your business given the state’s affordable cost of living, attractive tax structure, and no state income tax.