Taxation and Company Structure
Tennessee does not recognize the federal S corporation election. An S corporation in Tennessee is treated like a C corporation for state tax purposes. Sole proprietors there are not subject to franchise and excise taxes. To form an eligible corporation or LLC before electing S corporation status, file IRS Form 2553. S corporation status offers pass-through taxation and lower self-employment tax.
Business ownership options include:
- Sole proprietorship
- Partnership
- C corporation
- S corporation
- Limited liability company (LLC)
To start a corporation in Tennessee, file articles of incorporation with the Secretary of State. Tennessee requires corporations to have a registered agent. An LLC in Tennessee must file FAE 170 and pay a $100 minimum tax.
The process to dissolve a sole proprietorship in Tennessee involves:
- Notifying creditors
- Paying debts
- Filing paperwork
To change an LLC’s name in Tennessee, file a Certificate of Amendment.
Tax Differences Between S Corp and C Corp
The main differences between S Corp and C Corp revolve around taxation, stock options, ownership, and federal income tax liability. S corporations are restricted to one class of stock and offer pass-through taxation to its shareholders. In contrast, C corporations face potential double taxation on profits but have no restrictions on ownership and stock classes.
States and S Corporation Status
Most states accept the federal S corporation election without separate state filings, but this is not the case for Tennessee. Some states, like Colorado, do not require S corporations to pay state tax. Banks and insurance companies can’t be S corporations. C Corporations are better suited for large companies with many shareholders.
An S corporation avoids double taxation as income, losses, deductions, and credits flow through to shareholders, who then report this on their personal tax returns. This provides liability protection and potential tax savings compared to C corporations, where revenue is taxed at both the corporate and individual levels.