Tennessee LLC: S corp or C corp?

Tennessee at a glance

What is different about Tennessee?

Most states ask one question about an S election: how does the state tax the owners? Tennessee asks a different one. It taxes the LLC as an entity, and the S election does not turn that off. The Department of Revenue's manual lists C corporations, S corporations and LLCs side by side as taxable entities, and each one owes the 6.5% excise tax on net earnings and the franchise tax on net worth. A single-member LLC owned by an individual is not ignored the way it is federally; it files its own Tennessee return. So the question is not S corp versus no state tax. It is whether the federal gain from an S election is worth the extra paperwork on top of taxes you already pay.

Does Tennessee recognize a federal S corp election?

Tennessee recognizes your federal S election and asks for no separate state form, but it still taxes the S corp itself. An LLC taxed as an S corp pays the 6.5% excise tax on net earnings and the franchise tax of 0.25% of net worth, with a $100 minimum. Net earnings start from federal taxable income. The family-owned noncorporate entity exemption that some LLCs can use is not available to S corporations, so electing S status can cost you that option.

Does my LLC need a separate Tennessee election or form?

Tennessee has no separate S election form; the entity files its federal S election and then files a Tennessee franchise and excise return.²

What does Tennessee tax an S corp or LLC at the entity level?

• An S corporation in Tennessee pays the 6.5% excise tax on net earnings and the franchise tax of 0.25% of net worth, with a $100 minimum franchise tax.³
• A Tennessee LLC owned by an individual or by anything other than a corporation is not disregarded, so it files its own franchise and excise return and pays the same 6.5% excise and 0.25% franchise taxes.⁵
• The excise tax is 6.5% of net earnings for nearly every business entity in Tennessee, including LLCs and S corporations.⁷
• The franchise tax is 0.25% of net worth at the end of the tax year, with a $100 minimum, and it reaches S corporations and LLCs as well as C corporations.⁸
• Tennessee lists C corporations, S corporations and LLCs together as taxable entity types under the franchise and excise tax.⁹
• A family-owned noncorporate entity exemption exists for some LLCs, including a single-member LLC owned by an individual, but it is not available to S corporations.¹⁰

Is a Tennessee LLC taxed as a C corp ever better?

Tennessee charges a C corp two entity-level taxes, and both apply every year. The excise tax is 6.5% of net earnings. The franchise tax is 0.25% of net worth, measured at the close of the tax year, with a $100 minimum. Dividends you receive are not taxed by Tennessee as individual income, since the Hall income tax on interest and dividends was repealed for tax years beginning on or after January 1, 2021. The C corp adds no extra Tennessee entity tax compared with an S corp. The gap shows up on your federal return.

Run your Tennessee numbers

Your Tennessee bill is the same under either election, so an S election pays off on federal grounds alone. The manual notes that S corporation income is not subject to federal self-employment tax. The 6.5% excise tax and the franchise tax come due either way, so do not count any state savings. Weigh the federal gain against the added payroll and filing work.

How much would a Tennessee LLC owner save as an S corp?

Assumes a 60% salary¹² and a single filer. Income tax is left out. C corp dividends are taxed again. Tennessee figures are the 6.5% excise plus the $100 minimum franchise tax; the S corp deducts your salary, the default LLC does not.

When is the Form 2553 deadline for a Tennessee LLC, and what if I miss it?

Late relief: federal steps, deadline guide.

What to do next

More on Tennessee: How to start a Tennessee LLC · How to start a Tennessee corporation · Tennessee LLC cost · Tennessee annual report · Annual report late fees by state

Common questions