LLC vs S-Corp in Tennessee

The Tennessee Secretary of State handles entity formation. The IRS handles federal tax classification via Form 8832 and Form 2553. The Tennessee Department of Revenue administers the franchise and excise tax, which applies to LLCs and corporations (including S corporations) doing business in Tennessee. Tennessee does not tax individual wage income. Tennessee LLC basics. - Articles of Organization filed with the Tennessee Secretary of State. The filing fee is $50 per member, with a minimum of $300 and maximum of $3,000. A single-member LLC pays $300. - Annual report filed each year with the Secretary of State using the same per-member fee structure ($300 minimum). - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. - Tennessee imposes franchise and excise tax on LLCs, corporations, and S corporations doing business in the state. A single-member LLC owned by an S corporation or REIT is disregarded for franchise and excise tax. Tennessee franchise and excise tax: applies to LLCs and S corps alike. - Franchise tax: based on the greater of the taxpayer's net worth or the book value of real and tangible personal property in Tennessee. The minimum franchise tax is $100 per year. Federal S corp status does not exempt an entity from Tennessee franchise tax. - Excise tax: 6.5 percent of net earnings, with an exemption for the first $50,000 of net earnings (check current Department of Revenue guidance). - Filed on Form FAE 170 by the 15th day of the 4th month after the close of the tax year (April 15 for calendar-year filers). Tennessee S corp basics. - Federal S corp election flows through to federal income tax; Tennessee has no separate state personal income tax on wage or pass-through income. - The S corp still files the Tennessee franchise and excise tax return and owes at least the $100 minimum franchise tax. - Payroll. An S corp owner-employee must take a reasonable W-2 salary. Tennessee state unemployment tax applies once the employer crosses the wage threshold. Why a Tennessee trades shop might still elect S corp. The main reason in Tennessee is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Tennessee's franchise and excise tax treats LLCs and S corps similarly, so the S corp election is a federal decision with no major Tennessee-side penalty. Rule of thumb. Start as a Tennessee LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp. A CPA with Tennessee construction clients can run the breakeven for your numbers and confirm the current franchise and excise tax calculation.