A client moves to Nashville, files their S Corp paperwork, and feels pretty smug about it, convinced the S corp vs LLC decision was a no-brainer. No state income tax. Lower self-employment tax. Life is good.
Then the first state tax bill shows up and they call us asking what on earth a “franchise excise tax” is.
This happens constantly. We’re based in Tennessee, most of our U.S. clients are in Nashville or somewhere else in the state, and the number one surprise for people relocating here is a business-level tax nobody mentioned in the “move to Tennessee, pay no income tax” pitch. The S corp vs LLC decision looks completely different once you factor it in.
Here’s the whole thing broken down, plus the net income threshold where an S Corp still wins.
First, Untangle Two Different Taxes
Tennessee has no personal income tax. That part is true, and it’s a big reason people move here.
But the state still needs revenue, so it collects it somewhere else, and that somewhere else is your business. States without an income tax don’t magically run on goodwill. They build other taxes to fill the gap, and Tennessee’s version is the franchise and excise tax, usually shortened to F&E.
Two separate taxes bundled under one name:
| Tax | Rate | What it’s based on |
|---|---|---|
| Excise tax | 6.25% | Net income of the business |
| Franchise tax | 0.25% | Value of assets in the business (minimum $100) |
Simple example. You’re a consultant. Dating coach, interior designer, fractional CMO, doesn’t matter. You bill $100,000 into your entity and it’s all net income after expenses.
That’s $6,500 in excise tax to the state of Tennessee, before the $50,000 deduction covered below. Plus the franchise tax on your net worth, with a $100 floor.
Nobody enjoys that conversation.
Who Actually Pays It (This Is the Part People Get Wrong)
Now for the piece that changes everything.
The franchise excise tax applies to income that isn’t already getting hit with self-employment tax. Social Security and Medicare. That’s the logic behind the whole system.
So if you’re a sole proprietor or a single-member LLC, you’re already paying self-employment tax on your profit, and you’re generally not subject to F&E on that income. You feel the pain, sure, just in a different place.
If you’re an S Corp, you’re not paying self-employment tax on the profit distributions. Only on your reasonable compensation, the W-2 wages you pay yourself. That’s the entire point of the election. And that’s exactly why Tennessee wants its 6.5%.
Same money, different door.
“Wait, so being an S Corp actually costs me more in Tennessee?”
Sometimes. Not always. Keep reading, because the math is more interesting than that.
Run the S Corp vs LLC Comparison Before You Elect
Here’s the head-to-head for a Tennessee business owner:
| Structure | Self-employment tax | Tennessee F&E tax |
|---|---|---|
| Sole proprietor | 15.3% on net income | Not subject |
| Single-member LLC | 15.3% on net income | Not subject |
| S Corporation | Only on reasonable wages | 6.25% excise + 0.25% franchise |
Look at those two percentages side by side. 15.3% versus 6.5%. Given the choice, we’d take 6.5% every time.
But that comparison is a little too clean, because an S Corp doesn’t eliminate payroll taxes entirely. You still owe them on your reasonable salary. So the real question isn’t which rate is lower. It’s whether what you save on self-employment tax beats what you’ll owe Tennessee, plus the cost of running the thing.
The $80k to $90k Net Income Benchmark
From what we’ve seen across our Tennessee clients, the tipping point sits around $80,000 to $90,000 in net income. That’s income after expenses, not gross revenue.
Below that, the S Corp election in Tennessee often turns into a mess. You’re making $40,000 or $50,000, you have to pay yourself a reasonable salary (which eats most of the profit you were trying to shield), you save very little on self-employment tax, and now you’ve added the excise tax on top plus higher accounting fees to maintain the entity.
You’ve paid for the privilege of paying more tax.
Above that threshold, the savings hold up. You’ll still see real money staying in your pocket even after Tennessee takes its 6.5%. Use $90,000 as the safe number if you want a cushion.
Pro tip: run the numbers with your actual reasonable compensation figure, not a guess. The salary you’re required to pay yourself is what makes or breaks this calculation, and it’s the input people fudge most often.
The $50,000 Deduction Changes the Math
Tennessee added a deduction for businesses subject to excise tax, and it’s worth knowing before you panic.
You get a $50,000 deduction against the income subject to excise tax. So on that $100,000 net income example from earlier, you’re only paying the 6.5% on $50,000.
That cuts the sting roughly in half for smaller operations. It doesn’t make the tax disappear, and it doesn’t change the threshold logic much once your income climbs, but it’s a meaningful break at the lower end. Take it into account when you’re modeling the decision.
How Much Does It Cost to Start an LLC (and Keep It Running)?
People obsess over formation costs and ignore the recurring ones. That’s backwards.
The one-time cost of setting up an entity — the classic how much does it cost to start an LLC question — is a rounding error compared to what you’ll spend maintaining it. An S Corp means payroll, a separate business return, more bookkeeping precision, and a higher bill from whoever prepares it all. Those costs repeat every year, forever.
So when you’re weighing S corp vs LLC in Tennessee, add three line items to the loss column:
- The excise tax you’ll owe
- The franchise tax (minimum $100)
- The extra accounting and payroll costs of maintaining an S Corp
If the self-employment tax savings don’t clear all three with room to spare, stay where you are. And staying where you are is a perfectly good answer. Not every business needs a fancier structure.
What About S Corp vs C Corp in Tennessee?
Worth a quick note, because people ask.
The franchise excise tax isn’t unique to S Corps. Any structure where you’re not paying full self-employment tax on the business income can land in F&E territory, and that includes C Corps. So the S corp vs C corp question in Tennessee doesn’t hinge on escaping this tax. It hinges on the federal side, on how you plan to pull money out, and on what you’re building.
Don’t switch structures hoping to sidestep F&E. That’s not how the state built it.
Why Does This Tax Exist? Blame the Grocery Store
A quick bit of history, because it explains why the rules are written the way they are.
Back in the early 2000s, a major grocery chain figured out it could restructure its Tennessee operations into a pile of separate LLC entities, each one small enough to sit under the threshold and avoid the tax. Every store its own little entity. Clever, and completely legal at the time.
Tennessee noticed. The rules got tightened. Everybody else has been living with the consequences ever since.
The lesson for you isn’t to go build a stack of LLCs. It’s that this tax exists specifically because the state has been closing structural loopholes for two decades. Assume any clever workaround you find online has already been examined.
Are There Exemptions? Yes, With a Catch
There are ownership structures that can qualify a business for exemption from the franchise excise tax. Tennessee lists a number of them, and for some businesses they’re worth pursuing.
But here’s the honest read: the setup and maintenance costs are real, the compliance requirements are ongoing, and for a lot of small operations the exemption costs more than the tax it eliminates. Do the arithmetic before you get excited. If you’re at $100,000 of net income, the math on an exotic ownership structure looks very different than it does at $1 million.
Get an actual number on both sides before you commit. That’s the whole game.
Your Tennessee Entity Checklist
Before you incorporate here, relocate here, or file that S Corp election, work through this:
- Calculate your true net income. Revenue after expenses. Not gross. This single number drives every other decision.
- Determine your reasonable compensation. What would you have to pay someone to do your job? That’s the wage base you can’t avoid payroll tax on.
- Model the self-employment tax savings. The 15.3% only gets avoided on distributions above your salary.
- Subtract the 6.5% excise tax. Apply the $50,000 deduction first.
- Add the franchise tax. 0.25% of net worth, minimum $100.
- Add your incremental accounting and payroll costs. Be realistic here.
- Compare the total. If you’re under roughly $80,000 to $90,000 of net income, the S Corp probably isn’t worth it in Tennessee.
Run this before you file, not after. Undoing an entity decision is far more expensive than making the right one the first time.
The Bottom Line
Tennessee is genuinely a great place to run a business. No personal income tax is a real advantage, and we’re not talking anyone out of moving here.
Just don’t walk in blind. The franchise excise tax catches people who did their research on personal taxes and stopped there, and it hits S Corp owners hardest precisely because the S Corp election worked.
Know your net income. Know your threshold. Then pick the structure that actually fits your numbers, not the one some video told you was a magic tax hack.
If you’re relocating to Tennessee or sitting on the fence about an S Corp election, get the calculation done properly before you file. That one hour of math has saved our clients more money than any other conversation we have.
Related Reading
- Tennessee Franchise & Excise Tax | BizBud Tax Tips for S-Corps & LLCs
- How Tax Brackets Really Work (and the S Corp vs LLC Myth)
- New Tax Law + S Corp vs LLC: What Creators Actually Owe
- BizBud Case Studies: real client results
About The Author:
Cameron Botes is the founder of BizBud, a tax and accounting firm built for content creators, influencers, digital nomads, and entrepreneurs building businesses across borders. A former professional soccer player across four continents, Cameron brings the same discipline, preparation, and pressure-tested execution from his athletic career into helping business owners plan ahead, stay compliant, and keep more control over their financial future.
Since founding BizBud in 2020, Cameron has grown the firm from a one-person practice into a team of CPAs and tax advisors serving hundreds of clients across the U.S. and around the world. With an MBA in finance and accounting, international business experience, and a team with backgrounds at firms like PwC, Deloitte, and EY, Cameron helps creators and founders simplify taxes, clean up their books, and build smarter systems so they can focus on the work they actually love.
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