A corporation is a business structure that provides personal liability protection by separating the owner’s personal assets from the business’s assets. Thus, a corporation is liable for the business’s actions and finances, while the owners (known as shareholders) are not.
Corporation Pros
- Corporations provide liability protection for the shareholders
- A corporation can raise non-debt financing by selling shares of the business
- Taxation may be lower than a sole proprietorship or partnership
Corporation Cons
- Corporations are more complex and expensive to set up than sole proprietorships, partnerships, and Limited Liability Companies (LLCs)
- At a minimum, corporations are required to hold an annual board of directors meeting and shareholders meeting, take minutes at the meetings, issue shares, etc., to maintain the entity’s liability protection.
Generally, Corporations are chosen over Limited Liability Companies when a significant amount of funding is being raised from investors. However, due to the cost and complexity of a Corporation, most small businesses are better off forming an LLC.
Related: How To Form An LLC In Tennessee
The following steps are to create a domestic Corporation, which is the most common type for businesses. The other types of Corporations in Tennessee include a foreign Corporation (an out-of-state Corporation wanting approval to physically operate in the state), a professional Corporation (designated for Corporations offering professional services), or a non-profit Corporation.
Related: Tennessee Business Checklist
Steps to Forming a Corporation in Tennessee
Step 1: Choose a Name
The first step in forming a Corporation in Tennessee is selecting a name.
The name of the corporation has to be different from other entity names in the state of Tennessee. Check corporation name availability in Tennessee.
The name of the Corporation must include one of the following designators at the end of the business name:
- Corporation
- Incorporated
- Company
- Or an abbreviation of one of those words – Corp., Co., or Inc.
A comma may be used after the business name and before the designator. For example, “Common Grounds Coffee Inc.” and “Common Grounds Coffee, Inc.” are both acceptable.
If there is a name you want but are not ready to register the Corporation, you can file the Application for Name Reservation (Form SS-9425) with the Tennessee Secretary of State. The name reservation will hold a name for up to 120 days.
While a Corporation has to select a unique name that another Tennessee Corporation isn’t using, that doesn’t guarantee that the name isn’t currently used by someone else. Before registering a Corporation name, be sure to do a trademark search to verify it is available for you to use.
Step 2: Choose a Registered Agent
To have a Corporation in Tennessee, a Tennessee Registered Agent must be identified to act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the Corporation. This can either be a resident of Tennessee or a commercial registered agent service.
You can act as the Corporation’s Registered Agent in North Dakota, and you are not required to pay for a registered agent. The requirements to be a Registered Agent include someone generally being present at a registered address during normal business hours. A PO Box is not allowed.
Related: Do I Need To Hire A Registered Agent In Tennessee?
Step 3: File the Tennessee Corporate Charter
Next, you can start filing the Corporate Charter (called Articles of Incorporation in many states) with the Secretary of State. The Corporate Charter can be filed on the Secretary of State’s website or with Form SS-4417.
The information requested includes:
- The name of the Corporation must contain the words “Corporation,” “Incorporated,” “Company,” or an abbreviation. If the name already exists, you must get written consent from the name holder to use it.
- Additional designation. Most of the selections won’t apply to a small business, with the exception of a professional corporation. A professional corporation offers a service that is licensed in the state, such as an accountant, barber, home inspector, and more.
- Registered Agent’s name and physical address.
- Fiscal year close month. Corporations can choose any fiscal month, but most will use December.
- Period of duration. Most will choose perpetual as the end date of the business hasn’t been determined. Some businesses (such as an investment fund or real estate investment) will have a final date already established to close the Corporation.
- Delayed effective date. If you want to finalize the paperwork of the Corporation but not have it start for up to 90 days in the future, enter the future date. Otherwise, choose upon filing.
- Number of shares the Corporation is authorized to issue.
- Address of the Corporation’s principal office.
- The name and address of the incorporator(s). These can be the corporation’s owners or someone helping with the formation of the entity.
The Tennessee Corporate Charter can be filed online or submitted by mail. The mailing address is:
Tennessee Secretary of State
Division of Business Services
Snodgrass Tower, 6th Floor
312 Rosa L. Parks Ave
Nashville, TN 37243
Step 4: Create Corporate Bylaws
Bylaws are the general guiding principles and procedures for a business’s operations. For example, the bylaws may include the name of the corporation’s officers, the responsibilities of the board members, terms of office, procedures for removing or adding a new director or shareholder, policies for authorizing new shares, when shareholder and director meetings will be held, and more.
While bylaws are required in Tennessee, they are important as they can help reduce owner and shareholder disputes.
Step 5: Hold the Initial Board of Directors Meeting
During the first board meeting, the board of directors will, at a minimum, elect the officers of the Corporation (the President, Vice President, Treasurer, and Secretary). They will also typically review and approve corporate bylaws, choose a bank, issue shares of stock, and decide whether the Corporation will be taxed as a C corporation or S corporation.
It’s critical to remember that taking meeting minutes at all meetings is necessary to protect the shareholders from lawsuits and court actions. The minutes provide a written record of all decisions and actions taken during the meeting. Minutes aren’t filed with the state but should be stored along with other Corporate documents.
Step 6: Issue Shares of Stock
The corporation can exchange shares of stock in exchange for money or services. The number of shares of stock issued cannot be more than the number of authorized shares listed in the Corporate Charter.
Step 7: Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Like an individual’s social security number, the EIN identifies the Corporation for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.
The EIN is free when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Step 8: Elect the Corporation’s Form of Federal Income Taxation
By default, a new corporation will be taxed by the Internal Revenue Service (IRS) like a C-Corporation. C-Corporations pay corporate taxes on their profits, and the owners pay personal income taxes on their dividends.
A Corporation can elect to be taxed as an S-Corporation. S-Corporations are taxed as “pass-through entities,” meaning the Corporation does not file corporate taxes. Instead, the profits (or losses) “pass through” to the shareholders, who then report this income on their individual taxes.
For most small businesses, the S-Corporation tax election is the most beneficial because it eliminates the double taxation of the C-Corporation. This tax election can be changed; however, it is highly recommended to talk with an accountant before making this decision.
Step 9: Open a Bank Account
Opening a bank account for your Corporation is important for liability protection as the bank account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original Corporate Charter showing the creation of the Corporation in addition to the bylaws.
- Driver’s licenses of the members.
- Depending on the age of the Corporation, a Tennessee Certificate of Good Standing may be needed to prove the business entity is active and in good standing with the state.
Step 10: Apply for Business Licenses and Permits
Depending on what your business does and its location, various business licenses and permits will likely be needed before starting your business. Some common registrations include:
- Business License: Most businesses in Tennessee (even home-based businesses occasionally) need to purchase an annual business license with the County Clerk in the county where the business is located and possibly with the Municipal Clerk if the business is located within city limits.
- Professional License: Certain services, such as barbershops, accountants, salons, and others, must be licensed. Licensed professionals who go into business and offer a professional service have the option of forming a Professional Corporation.
- Sales Tax Permit: To sell products and certain services, a Tennessee Sales Tax Permit from the Tennessee Department of Revenue will be necessary.
Related: How To Register A Business In Tennessee
Step 11: File Annual Reports and pay Franchise Taxes & Excise Taxes
Corporations are required to submit a Tennessee corporation annual report to the Tennessee Secretary of State. The annual report is due each year before the first day of the fourth month following the end of the Corporation’s fiscal year. Most corporations use December 31st as the end of their fiscal year; in this case, the annual report is due April 15th.
Additionally, a franchise tax and excise tax are due each year. The minimum franchise tax is $100 and is a percentage of the corporation’s net worth or real and tangible property in Tennessee. The minimum excise tax is $10 and is based on net earnings.
What is the difference between Corp., Co., or Inc.?
Corp., Co., and Inc. all refer to entity designators that can be used at the end of a Corporation name in Tennessee.
How many shares of stock should be issued?
The total number of shares to authorize can be as many as you want. In your initial corporate documents, the company will authorize a certain number of shares that may be issued but don’t have to issue all of these. Let’s say there are 1,000 shares authorized; you can issue 100 shares to the owner and leave the rest to issue if you ever decide to raise additional funds.
