Tennessee S Corp: Everything You Need to Know
A Tennessee S corp can be taxed within the subchapter S of the IRS Code, which means it's taxed just one time, like partnerships and sole proprietorships.3 min read
2. Advantages of an S Corporation in Tennessee
3. Disadvantages of an S Corporation in Tennessee
4. Points to Consider to Form a Tennessee S-Corporation
A Tennessee S corp chooses to be taxed within the subchapter S of the IRS Code, which means it's taxed just one time, like partnerships and sole proprietorships. The S Corp is separate from its owners.
Forming a Tennessee S Corp: Understanding the Basics
For people who want limited liability and a more formal structure with simple taxation, a Tennessee S Corp is ideal. It is a corporation that becomes an S Corporation when the shareholders vote for a special taxation with the IRS.
An S Corporation is identified as an individual entity which is apart from its shareholders. Tennessee shareholders enjoy limited liability for the business including that of legal matters. Shareholders choose to create an S Corp to protect their personal assets.
Shareholders usually do not lose more than what they invested in the company. If the corporation goes bankrupt, the shareholders are not liable for its debt. Even if someone takes them to court, their personal assets will not be touched.
An S corporation doesn't pay income taxes; the shareholders do have to share their loss or profit of their contribution to the corporation in their tax return like in a limited liability company. You have to file an IRS Form 2553 to start an S Corporation in Tennessee.
Advantages of an S Corporation in Tennessee
- Since the corporation is relatively independent, it doesn't depend on the incapacity or death of the shareholders to continue.
- Owning fractional ownership shares is relatively easy in the initial stock offering.
- The ease of stock ownership distribution makes it possible to make changes without disrupting the business's ability to continue its operations.
- The finances and records of the corporation are separate from the finances and records of the shareholders, so the risk of mysterious equity liquidations is reduced.
- In most instances, the S Corporation doesn't have to pay income taxes and corporation income or loss is directed to the stockholders.
- If the investments and savings are kept safe, the personal assets of the shareholders are simplified.
- A yearly meeting between stockholders and legal counsel can help to have a peaceful discussion between the stockholders and maintain management guidance.
- Credit access and securing resources can be improved depending on the corporation's record and lender practices.
- Return on investment earnings is not part of self-employment tax as long as employees get a reasonable pay for their business labor.
Disadvantages of an S Corporation in Tennessee
- If the corporation is looking for money, lenders may ask for personal guarantees from the officers, which changes the limitation of liability.
- If there is a disagreement between stockholders, it can stop decision making for the corporation.
- If there are restrictions to buybacks and the sale of stock in the bylaws, then minor shareholders cannot recover their initial investment.
- The possibility of shares being held thanks to gifting and inheritance among people who aren't active in the corporation can become a block for active shareholders looking for more support.
- Taxable income of benefits and insurance comes into play with shareholders who own 2% or more of the corporation's stock and to persons related to these shareholders.
- If assets increase in value and are corporately owned, once the corporation is dissolved the income tax on the assets which appreciated is generated.
Points to Consider to Form a Tennessee S-Corporation
- The official documents have to be filed in the state for a Tennessee S-Corporation to be created, as well as paying the filing fees.
- Make sure to file the 2553 IRS form to receive a special tax status.
- A Tennessee S-Corporation is a separate entity from its shareholders.
- The Tennessee S-Corporation does have limitations as to the kind of business you can undertake.
- Each time there is a meeting between the shareholders and board of directors, the minutes have to be recorded.
- No more than 100 shareholders are allowed in a Tennessee S-Corporation. Corporations, limited liability companies, and non-residents are some kinds of shareholders that are not allowed to own a part of the corporation.
- Even after creating a Tennessee S Corporation, make sure to continue certain steps to preserve a limited liability to its owners. Doing so will keep the business in compliance.
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