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A corporation is a type of business that is legally separated from the owners of the business and can issue stock based on the value of the company. Corporations are more formal than LLCs and have more flexibility to raise financing from various investor types. Corporations are typically taxed at higher rates than LLCs and have more regulations to follow.
There are two types of corporations: C-Corporations and S-Corporations.
C-Corporations are the traditional corporations you think of when you hear about a company on the Stock Market. A C-Corporation has shareholders, a board of directors, and corporate officers (CEO, CFO).
S-Corporations are a type of corporation that traditionally (depending on the state) doesn’t pay corporate income taxes. S-Corporations have strict restrictions on the number of shareholders and don’t allow foreign shareholders.
The rest of this article is about forming C-Corporations.
- Pick a name that is distinguishable and available. While the meaning of “distinguishable” varies by state, it typically means a name should be different enough from an existing business name to avoid confusing a consumer. Here’s an example:
-“Delicious Cookies” and “The Delicious Cookie” are not different enough.
-“The Most Delicious Cookie” and “Delicious Cookies” are different enough to pass the test.
- Available means no one else claimed the business name in the state.
Tennessee considers the following things as distinguishable enough to allow registration:
- it contains one or more different letters, and/or words, or it has a different sequence of letters and/or words,
- Differences between singular and plural forms of words are distinguishing.
Tennessee does not consider the things listed below as "distinguishable" enough to allow registration:
- not distinguishable by using required ending words such as “incorporated,” “corporation,” “company,” “limited liability company,” “limited partnership,” “limited liability partnership” or abbreviations of such words.
- not distinguishable by differences in punctuation or capitalization, or the presence or absence of articles, conjunctions or prepositions as symbols or words (including “the,” “a,” “and,” “of,” “in,” “at” and “plus”).
- Every corporation has to use a corporate suffix to indicate the company is a corporation. This means the last word in the name must be: “Inc." or "Corp" or "Corporation" or an abbreviation of those.
- Tennessee allows you to reserve a name prior to registering the company. This prevents someone else from registering the name. WizForm recommends against reserving a name as its generally an unneeded expense for the company.
Corporations cannot use a prohibited word. While this list is made for Michigan, the rules apply to most other states. These words are reserved for companies with specific permissions to operate as a doctor, banker, or other profession listed.
What is a Fictitious Name? How do I register a Fictitious Name in Tennessee?
Fictitious names, also called DBAs/Trade Names/Assumed Names/Alternate Names, are made-up names that you can use to market your business.
Fictitious names are used for three reasons:
- Companies want to market their company in multiple different ways. Imagine Coca-Cola Company vs. Coke.
- There is a large company that owns multiple smaller companies with distinct brands. Imagine Alphabet, Inc. vs. Google.
- A company registered in one state cannot use their original name in a new state because the original name isn't available. They need a fictitious name.
If you'd like to file a fictitious name in Tennessee, you can register for it via mail with the Tennessee Secretary of State.
Article of Incorporation is the document that every domestic corporation in Tennessee has to file to register their company with the state of Tennessee.
The Article of Incorporation includes business name, mailing address, and authorized shares. You can file the Article of Incorporation on the Tennessee Secretary of State website.
You might be wondering: Why would I use a service like WizForm to do this if I can just do it myself? You could do it by yourself but there are several benefits to using services like WizForm.
- 1. Protecting your privacy. When you file the Article of Incorporation, all the information on the document is public (your name, your address, email, phone number). Anyone can look it up and use that information to send you mail/email/phone calls. If you use WizForm, we will incorporate on behalf of you and protect your privacy by using our name, address, email, and phone number.
- 2. Filling out the form correctly. While most of the sections are self-explanatory, there are some key sections that can be confusing. These include the company's duration, authorized shares, par value, the effective date of the company, and picking the right name. Additionally, you want to be careful that you don't over-disclose on the filing if your business needs to evolve in the future.
- 3. Using a Registered Agent. See the section below for more on registered agents and why you should use one.
- 4. Setting up bylaws. Bylaws are the rules that govern how a business is run. You need to make sure that your bylaws cover situations like how to dissolve the company, transferable interests (if someone dies or gets divorced), rights of stockholders if the company gets acquired, and voting procedures.
A registered agent is a person or company acting as your company’s contact when the government needs to reach you about a legal matter. This person is the person that is “served” a lawsuit. It’s smart to use a registered agent to protect your privacy and to ensure your company is reachable if a legal matter arises. If you appoint yourself as a registered agent and aren’t around when someone tries to serve you a lawsuit, the court can enter a default judgment for the other side (which is expensive).
Most states require you to have bylaws for your corporation. These rules range from how profits are distributed to dissolving the company. All corporations need bylaws because the government will control how you run your company without one.
Each state varies in what a business is allowed to put in its bylaws. If you want to write an bylaws yourself (we do not advise this), you should look for these things in the state law:
- Does the state limit indemnification?
- Voting Rights of Shareholders
- Appraiser and Dissenter Rights
- Transfer Rights and how divorces/deaths affect the rights of members
- Profit Distribution
- To set up a bank account and get paid by other vendors, you will need an Employer Identification Number (EIN). The IRS provides EINs for free.
- You will use your EIN to pay taxes with the federal government.
Every business has to pay local, state, and federal taxes. Corporations are double taxed: income is first taxed at the company level and then again at the personal income level when passed to shareholders.
Tennessee Specific Taxes
- If your business sells items that require sales tax, you need to register with the Tennessee Department of Revenue to set up a sales tax account.
- If you have employees that earn wages, you need to register with the Tennessee Department of Revenue to set up wage withholding, worker's compensation, and unemployment insurance.
- You must register for and pay franchise and excise taxes. The franchise tax is based on the greater of net worth or the book value of real or tangible personal property owned or used in Tennessee. The excise tax is based on net earnings or income for the tax year. You can register for it here.
- Tennessee is unique in that it doesn't have a personal income tax or corporate income tax.
- You are required to file federal personal income tax and federal corporate income tax on any profits that are made by your business.
State governments refer to out of state companies as "foreign." This term includes out of state and out of country.
States require you to register as a business if you "do business in a state." This term isn't super clear as each court will evaluate a business on a case by case basis. In general, you should register your business if you do any of the following:
- You have contracts with people or companies in the state.
- You have employees or offices in the state (this includes the founders)
- You have bank accounts in the state.
- You are paying local taxes or sales taxes in the state.
- You use wholesalers or affiliates in the state to sell your product.
The key is if you are doing business consistently or in a 1-time transaction. If you are consistently doing business in a state, you need to register there.
To register in Tennessee as a foreign corporation, you need to:
- Obtain a Certificate of Existence from the first state you incorporated in.
- File an Application for Authority with the Tennessee Secretary of State.
- Need to adhere to all tax requirements and annual filing requirements like domestic corporations.
All Tennessee corporations and foreign corporations authorized to do business in the state must file an annual report. Annual reports are due on or before the first day of the fourth month following the corporation's fiscal year closing.