LLC vs S-Corp in Tennessee

Making choices as an entrepreneur is a big challenge, especially when choosing what business structure to form in Tennessee. When it comes to a business structure, you can choose whether to have a C-corporation, S-corporation, Sole Proprietorship or an LLC in Tennessee. Before you start Tennessee LLC filing, you must compare which structure suits you. You might be considering two popular options: a Limited Liability Company (LLC) or an S Corporation (S-Corp). Both of these structures offer distinct advantages and protections, but selecting the right one depends on various factors, including your business goals, tax preferences, and management style.

If you are confused with Tennessee LLC vs. S-Corporation, and thinking which one is better and more suitable for the business that you will form, there are a few things that you should consider. Before we get through this article, you should understand what an LLC and S-Corporation mean in Tennessee.

LLC vs. S-Corp: Definition

While forming an LLC, you must follow some major steps. It is a business structure that protects your personal assets from getting affected by business liabilities. On the other hand, the S Corp is not a conventional business structure, but it is tax status that your can file with the IRS. S Corp does not provide personal asset protection like an LLC. Here are the detailed definitions of the two-

What is an LLC in Tennessee?

A limited liability company (LLC) is a formal business structure that provides personal asset protection. Under this structure, the LLC owner/member can save his/her personal assets in case the business is in debt or is being targeted with a lawsuit. In some special cases, if your company is legally sued, the other party can go after your personal assets. This is called piercing the corporate veil, where you become personally liable for the company’s debt.

Forming an LLC in Tennessee gives you a pass-through tax benefit where you don’t have to pay an income tax based on your business revenue; instead, the income tax will be calculated based on your personal income.

What is an S-Corp in Tennessee?

An S-Corporation (S-corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other business structures. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-Corporation is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

S-corp is a prominent alternative to the LLC. Unlike a conventional C-corp, S-corp is more suitable for small and medium businesses, such as businesses with 100 shareholders.

LLC Vs. S-Corporation: Which is More Preferable in Tennessee?

In Tennessee, forming a business is crucial since you need to be adequate in your decision, especially when you think if Tennessee LLC or an S-Corporation in Tennessee is preferable. An S-Corporation is a tax classification that some small businesses are qualified for, whereas an LLC is a legitimate company form. By submitting a document to the Internal Revenue Sector (IRS), corporations and LLCs can choose S-Corporation taxation. An S-Corporation can be less formal than forming an LLC and doesn’t normally provide the same protection. Also, unlike LLC, S-Corporation in Tennessee doesn’t provide the same protections entrepreneurs seek from an LLC. It’s important to consider your options when launching a business from a legal and tax point of view.

It is better to consult a legal professional before you set up an LLC or S-corp. We shared basic differences and how you can form an LLC and S-corp. But it is always recommended to consult a professional before making any decision.
– LLCBuddy Editorial Team

Tax Difference Between Tennessee LLC and S-Corp in Tennessee

There is a difference between LLC and S-Corporation when it comes to paying taxes. Based on Federal and State Tax differences between the two, you can determine if S-Corporation or LLC in Tennessee is suitable for your business.

Federal Taxes: There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Tennessee. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

Pass-Through Taxes: LLC and S-Corporation in Tennessee are the same in terms of pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners are required to pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Tennessee are mandated to have double taxation. It means that they must pay federal taxes at the entity level.

Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Tennessee to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes.

Consider the scenario where you are the only owner of an LLC in Tennessee with a $150,000 annual profit. And let’s say that $100,000 is a fair wage in your location for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $150,000 profit. But, if your company is taxed as a Tennessee S-Corp, you will only be responsible for paying payroll taxes on the standard wage of $100,000. Income tax will still apply to the remaining $50,000.

Tennessee State Taxes: At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Tennessee, it costs $50 per member that can be paid to the TX Comptroller. Of course, before forming the whole LLC, you must pay the initial fee of $300.

On the other hand, you also need to pay taxes if you form an S-Corporation in Tennessee; besides, you must pay the S-Corp filing fee and an annual report fee after a year of establishing your S-Corp. You must also go to the TX Comptroller to pay this.

How do Tennessee LLCs and S-Corporations Handle Liability Protection?

In Tennessee, you have no personal responsibility for the financial and legal liabilities of an LLC you will form. An S-Corporation does not provide liability protection because it is a tax designation rather than a distinct business entity. Whatever liability defense an S-Corporation provides is provided by the underlying business entity that chose the tax status. You will have the liability protection the LLC offers if it chooses S-Corporation status for tax purposes.

LLC Vs. S Corporation Ownership Requirements Comparison

Strict ownership requirements exist for LLCs and S-Corporations in Tennessee. LLC ownership regulations are strict because a new member can only be accepted with the approval of all existing members. On the other hand, S-Corporation ownership regulations are also strict because only specific people are permitted to become shareholders. Also, an S-Corporation can’t have more than 100 shareholders and needs one class of stock.

The following are the reasons why some cannot be shareholders in the S-Corporation in Tennessee.

Insurance business
Domestic and International sales corporations
Partnerships
Corporations
Unauthorized Immigrants
Certain financial institutions

Although you know most of the reasons regarding the ownership requirements of both LLC and S-Corporation, you should still seek legal advice in preparation for your business and it is best to visit LLCBuddy for your Tennessee LLC or Tennessee S-Corp.

Which is Easier to File in Tennessee: LLCs or S-Corporations?

Filing an LLC or S-Corporation in Tennessee takes time and preparation. Even though it is not as easy as it seems, something manageable still makes it not difficult. LLC and S-Corporation can be filed by Tennessee Registered Agent. However, in order to establish an LLC in Tennessee, you must submit a Articles of Organization to the Tennessee Secretary of State. Your Articles of Organization must contain information for your LLC, along with payment of the associated filing fee.

In addition, you need to submit more papers to make the Tennessee S-Corporation election. File a Form 8832 to inform the Internal Revenue Sector (IRS) that you prefer to tax your LLC as a corporation rather than a partnership. Then you will then submit Form 2553 to choose S-Corporation status.

Do not forget that you must submit annual tax returns and reports after creating your LLC in order to maintain legal compliance.

Important Information

Who Pays More Taxes, an LLC or S-Corporation?

Taxes differ for LLC and S-Corporation in Tennessee because it depends on the tax purposes and how much profit will be generated. Usually, LLCs are frequently taxed at personal rates and LLC owners can elect to be treated as a separate company with its own federal tax identification number.

On the other hand, owners of S-Corporations must receive a salary that includes Social Security and Medicare taxes. The owner, however, can get dividend income or some of the leftover profits, but not as an employee; thus, they won’t be subject to Social Security and Medicare taxes on that money.

Should I Convert an LLC to S-Corporation?

Since your business assets are separated from your personal assets if you’re a sole proprietor, it may be advisable to form an LLC. You are not restricted to modifying the structure of your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and adhere to more regulations, it would be ideal for more companies with more shareholders.

How to Structure an LLC to S-Corporation?

To structure an LLC to S-Corporation in Tennessee, you must submit Form 2553, Election by a Small Business Corporation, to the IRS in order to choose S-corp taxation. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or not more than 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, in order to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS. In Tennessee, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

FAQs

What are the advantages of forming an LLC in Tennessee?

Forming an LLC in Tennessee offers several advantages, such as limited liability protection for the owners, simplicity of management, and pass-through taxation.

How do I form an LLC in Tennessee?

To form an LLC in Tennessee, you must file the Articles of Organization with the Tennessee Secretary of State. Additionally, you must also pay a filing fee and submit an Operating Agreement.

What are the tax benefits of forming an LLC in Tennessee?

LLCs in Tennessee are taxed as pass-through entities, meaning the LLC itself does not pay taxes, but the profits or losses are passed through to the members’ personal income tax returns.

What is the difference between an LLC and an S-Corp in Tennessee?

The main difference between an LLC and an S-Corp in Tennessee is the way they are taxed. An LLC is taxed as a pass-through entity, meaning the LLC itself does not pay taxes, but the profits or losses are passed through to the members’ personal income tax returns. An S-Corp, on the other hand, is subject to corporate taxes.

What are the advantages of forming an S-Corp in Tennessee?

The primary advantage of forming an S-Corp in Tennessee is that the business can take advantage of corporate tax rates, rather than pass-through taxation. Additionally, the shareholders of an S-Corp can take advantage of certain deductions and credits that may not be available to LLC members.

How do I form an S-Corp in Tennessee?

To form an S-Corp in Tennessee, you must first form an LLC or corporation and then file Form 2553 with the IRS. You must also file the appropriate paperwork with the Tennessee Secretary of State.

What are the requirements for forming an LLC in Tennessee?

To form an LLC in Tennessee, you must file the Articles of Organization with the Tennessee Secretary of State. Additionally, you must also pay a filing fee and submit an Operating Agreement.

What are the requirements for forming an S-Corp in Tennessee?

To form an S-Corp in Tennessee, you must first form an LLC or corporation and then file Form 2553 with the IRS. You must also file the appropriate paperwork with the Tennessee Secretary of State.

Is there a limit to the number of members an LLC in Tennessee can have?

No, there is no limit to the number of members an LLC in Tennessee can have.

What is the filing fee for forming an LLC in Tennessee?

The filing fee for forming an LLC in Tennessee is $50.

What is the filing fee for forming an S-Corp in Tennessee?

The filing fee for forming an S-Corp in Tennessee is $50.

What is the deadline for filing an LLC in Tennessee?

The deadline for filing an LLC in Tennessee is within 15 days of the filing date.

What is the deadline for filing an S-Corp in Tennessee?

The deadline for filing an S-Corp in Tennessee is within 75 days of filing Form 2553 with the IRS.

Does Tennessee have an LLC or S-Corp registration fee?

No, Tennessee does not have an LLC or S-Corp registration fee.

Is an LLC in Tennessee required to file an annual report?

Yes, an LLC in Tennessee is required to file an annual report with the Tennessee Secretary of State.

Is an S-Corp in Tennessee required to file an annual report?

Yes, an S-Corp in Tennessee is required to file an annual report with the Tennessee Secretary of State.

Is an LLC in Tennessee required to have an Operating Agreement?

Yes, an LLC in Tennessee is required to have an Operating Agreement.

Is an S-Corp in Tennessee required to have an Operating Agreement?

No, an S-Corp in Tennessee is not required to have an Operating Agreement.

Does Tennessee recognize single-member LLCs?

Yes, Tennessee does recognize single-member LLCs.

Does Tennessee recognize multi-member LLCs?

Yes, Tennessee does recognize multi-member LLCs.

Is there a minimum capital requirement for forming an LLC in Tennessee?

No, there is no minimum capital requirement for forming an LLC in Tennessee.

Is there a minimum capital requirement for forming an S-Corp in Tennessee?

No, there is no minimum capital requirement for forming an S-Corp in Tennessee.

What are the requirements for maintaining an LLC in Tennessee?

To maintain an LLC in Tennessee, you must file an annual report with the Tennessee Secretary of State and pay any applicable taxes.

What are the requirements for maintaining an S-Corp in Tennessee?

To maintain an S-Corp in Tennessee, you must file an annual report with the Tennessee Secretary of State, pay any applicable taxes, and comply with all applicable laws.

Does Tennessee have any special tax rates for LLCs?

No, Tennessee does not have any special tax rates for LLCs.

Does Tennessee have any special tax rates for S-Corps?

No, Tennessee does not have any special tax rates for S-Corps.

Are LLCs in Tennessee required to have a registered agent?

Yes, LLCs in Tennessee are required to have a registered agent.

Are S-Corps in Tennessee required to have a registered agent?

Yes, S-Corps in Tennessee are required to have a registered agent.

Are LLCs in Tennessee subject to double taxation?

No, LLCs in Tennessee are not subject to double taxation.

Are S-Corps in Tennessee subject to double taxation?

No, S-Corps in Tennessee are not subject to double taxation.

Why Tennessee LLC Vs S Corp is So Important

One of the main factors that business owners must consider when choosing between an LLC and an S Corp is the flexibility that each structure offers. LLCs are known for being highly flexible in terms of management structure and taxation. Business owners can choose to operate their LLC as a sole proprietorship, a partnership, or a corporation, depending on their specific needs and goals. This flexibility can be a major advantage for businesses that are still in the early stages of development and may need to adapt to changing circumstances.

On the other hand, S Corporations are subject to stricter regulations regarding ownership and management. In order to qualify for Subchapter S status, businesses must meet certain criteria, such as having no more than 100 shareholders and only issuing one class of stock. While these requirements can limit the flexibility of an S Corp, they also come with certain tax advantages. For example, S Corporations are not subject to corporate income tax at the federal level, which can result in significant tax savings for business owners.

Another important consideration for business owners choosing between an LLC and an S Corp is the treatment of profits and losses. In an LLC, profits and losses are typically passed through to the individual members of the company, who then report these amounts on their personal tax returns. This pass-through taxation can be advantageous for smaller businesses, as it avoids the double taxation that can occur with corporations.

In contrast, S Corporations are subject to a different tax treatment. While S Corps also offer pass-through taxation, they are required to pay reasonable compensation to their owners, who are then taxed at the individual level on this income. Any remaining profits are passed through to the shareholders and taxed at their personal tax rates. This can be a complex process that requires careful record-keeping and compliance with tax regulations.

Ultimately, the decision to choose between an LLC and an S Corp will depend on the specific needs and goals of the business owner. While LLCs offer greater flexibility and simpler tax treatment, S Corporations can provide certain tax advantages for businesses that meet the eligibility requirements. Business owners should carefully consider these factors and consult with a legal or tax professional before making a decision.

In conclusion, the choice between a Tennessee LLC and an S Corp is a critical decision that can have long-term implications for a business. By understanding the key differences between these two structures and considering their individual needs and goals, business owners can make an informed decision that sets their business up for success in the future.

Conclusion

Even though you can choose a different corporate structure, consider whether it will primarily assist your organization. Striking the perfect balance between corporate benefits and legal protection that suits your particular needs is important. In forming an LLC or S-Corp in Tennessee, you must be aware that every detail is well-formed so that starting your business will be successful. And, if you would like us to help you form a Tennessee LLC and S-Corp in Tennessee, read our other business guides.