Forming a Corporation in Tennessee: The Charter, Bylaws, Shares, S Election, and Upkeep

If you have chosen a corporation over an LLC, the next job is building it so the documents, the share records, and the tax elections fit together.

The charter: what it must say and what it may say

Tennessee calls the formation document a charter. One or more incorporators form the corporation by delivering it to the Secretary of State (Tenn. Code Ann. § 48-12-101), and unless a delayed effective date is specified, the corporation exists when the charter is filed (§ 48-12-103(a)). The charter must state the corporate name, the number of authorized shares, the initial registered office (with its county) and registered agent, the name and address of each incorporator, the initial principal office, the share information required by chapter 16, and that the corporation is for profit (§ 48-12-102(a)).

The charter may also name the initial directors, state a purpose, and regulate management and the powers of the board and shareholders. It may eliminate or limit a director's personal liability for monetary damages for breach of fiduciary duty, but not for breaches of the duty of loyalty, acts or omissions not in good faith, intentional misconduct, knowing violations of law, or liability under § 48-18-302 (§ 48-12-102(b)(3)). The charter filing fee is $100 (Tenn. Code Ann. § 48-11-303(a)(1)), and the Secretary of State's form is SS-4417, Charter For-Profit Corporation.

Authorized shares and classes

The charter must authorize classes that together have unlimited voting rights and classes that together are entitled to the net assets on dissolution. If there is more than one class, each needs a distinguishing designation, and its rights must be described in the charter before its shares are issued (§ 48-16-101(a), (b)). The charter can also authorize nonvoting, redeemable, convertible, or preferred classes, or a par value, which does not by itself set a minimum price (§ 48-16-101(c)).

Organizing after filing: the meeting, bylaws, and officers

If the charter names initial directors, they hold an organizational meeting to appoint officers, adopt bylaws, and handle other business. If it does not, the incorporators hold the meeting, on at least two days' notice, to elect directors and complete the organization, or to elect a board that completes it. The incorporators can act by written consents instead, and the consents go in the corporate records (§ 48-12-105(a), (b)). Skipping the meeting does not by itself invalidate corporate action (§ 48-12-105(d)).

• Bylaws: the incorporators or the board must adopt initial bylaws, which may contain any provision for managing the business that is consistent with the law and the charter (§ 48-12-106).
• Officers: those described in the bylaws or designated by the board under them. One officer must be responsible for minutes and records, and one person may hold several offices (§ 48-18-401).
• Before filing: people who act for a corporation knowing it has not been incorporated are jointly and severally liable for the obligations they create, with a narrow exception (§ 48-12-104).

Issuing shares and what counts as consideration

Unless the charter reserves the power to the shareholders, the board decides what the corporation will accept for its shares: any tangible or intangible property or benefit, including cash, promissory notes, services already performed, contracts for future services, or other securities of the corporation (§ 48-16-202(a), (b)). The board must find the consideration adequate before issuing shares, and its decision to accept it counts as that finding. Once the corporation receives what the board authorized, the shares are fully paid and nonassessable, and shares issued for a note or future services may be escrowed until the note is paid or the services are performed (§ 48-16-202(c) to (e)).

Selling shares to outside investors raises securities law questions beyond this article. Many of the questions in how an LLC can raise capital from private investors also arise when a corporation sells stock.

Who decides what: the board and the shareholders

By default, all corporate powers are exercised by or under the authority of the board, subject to any limits in the charter (§ 48-18-101(b)). The board can be a single individual, and directors are generally elected at each annual shareholders' meeting (§ 48-18-103(a), (d)).

• Annual meeting: held at a time set by the bylaws, unless directors are elected by written consent. Failing to hold it on time does not affect the validity of corporate action (§ 48-17-101).
• Written consents: shareholders can act by unanimous written consent, or, if the charter allows, by the written consent of holders of the votes that would be needed if all voting shares were present at a meeting, with written notice to nonconsenting voting shareholders within 10 days (§ 48-17-104(a), (b), (f)). Unless the charter or bylaws require a meeting, the board can act by written consent signed by every director (§ 48-18-202(a)).

Shareholder agreements and close-corporation flexibility

The Tennessee Business Corporation Act has no separate statutory close-corporation chapter (chapter 19 of title 48 is reserved). Instead, several provisions give a closely held corporation room to run more like a partnership:

• Voting agreements: two or more shareholders can agree in a signed writing how their shares will be voted, and the agreement may be specifically enforced (§ 48-17-302(a)).
• Management agreements: a written agreement the shareholders have actually assented to is not invalid between the parties because it restricts the board's discretion or treats the corporation like a partnership. To that extent, liability for managerial acts shifts to the assenting shareholders, and a transferee who takes shares with notice is bound (§ 48-17-302(b) to (d)).
• No board, or a limited board: a corporation with 50 or fewer shareholders can dispense with or limit the board by describing in its charter who will perform the board's duties, and those persons are held to the directors' standards of conduct (§ 48-18-101(c)).
• Transfer restrictions: for a reasonable purpose, the charter, the bylaws, or an agreement can require that shares be offered first to the corporation or others, require a buyout, or require approval of a transfer if that is not manifestly unreasonable. A restriction does not bind earlier-issued shares unless their holders agreed or voted for it, and it binds a person without knowledge of it only if noted conspicuously on the certificate or the written statement for uncertificated shares (§ 48-16-208).

A buy-sell agreement for a corporation is built on these provisions.

The federal S corporation election

Without an S election, a corporation pays federal income tax on its own taxable income, at 21 percent (26 U.S.C. § 11(a), (b)). An S corporation generally is not subject to that tax, and each shareholder takes into account a pro rata share of the corporation's income, losses, deductions, and credits (26 U.S.C. §§ 1363(a), 1366(a)). Which fits is a question for your CPA. To be eligible, the corporation must be a domestic corporation that is not an ineligible corporation and does not (26 U.S.C. § 1361(b)(1)):

1. Have more than 100 shareholders.
2. Have a shareholder that is not an individual, other than an estate or certain trusts and organizations described in the statute.
3. Have a nonresident alien as a shareholder.
4. Have more than one class of stock.

Differences in voting rights among common shares do not create a second class (26 U.S.C. § 1361(c)(4)). Whether shares carry identical distribution and liquidation rights is judged from the governing provisions, including the charter, bylaws, state law, and binding agreements on those proceeds, though buy-sell agreements, transfer restrictions, and redemption agreements are generally disregarded, with exceptions (26 C.F.R. § 1.1361-1(l)(2)(i), (iii)(A)). The shareholder agreement and any preferred class are worth a CPA's review before the election.

The election is valid only if every person who is a shareholder on the day it is made consents (26 U.S.C. § 1362(a)(2)). An election made during the year it is to cover also needs the consent of anyone who held shares earlier that year, or it is treated as made for the following year (§ 1362(b)(2)). According to the IRS instructions, Form 2553 is filed no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year (Instructions for Form 2553, rev. December 2020; see 26 U.S.C. § 1362(b)(1)). For an election effective for a new corporation's first tax year, the instructions direct it to enter the earliest of the date it first had shareholders, first had assets, or began doing business. A late election generally takes effect for the following year, although relief may be available for reasonable cause (Instructions for Form 2553; 26 U.S.C. § 1362(b)(3), (5)). My S corporation election page covers the election work.

Tennessee franchise and excise tax

The S election does not take a corporation out of Tennessee's franchise and excise taxes. The statutes define a taxpayer to include every corporation and every subchapter S corporation (Tenn. Code Ann. § 67-4-2004(36)). The Department of Revenue states that corporations chartered, qualified, or registered in Tennessee, or doing business here, must register for and pay these taxes. By statute, the franchise tax is 0.25 percent of net worth, with a $100 minimum owed even by an inactive registered entity, and the excise tax is 6.5 percent of net earnings from business done in Tennessee (Tenn. Code Ann. §§ 67-4-2106(a), 67-4-2119, 67-4-2007(a)). The return is due the 15th day of the fourth month after the tax year closes (§ 67-4-2015(a); Tenn. Comp. R. & Regs. 1320-06-01-.02).

Annual report and corporate records

Each corporation files an annual report with the Secretary of State showing its registered office and agent, principal office, directors and principal officers, and federal employer identification number or control number, due by the first day of the fourth month after its fiscal year ends, or a date set by rule (§ 48-26-203(a), (c)). The Secretary of State may begin administrative dissolution if, among other grounds, the report is more than two months late or the corporation has been without a registered agent or office for two months (§ 48-24-201(1), (2)). Since 2025, the grounds also include filing a document that the signer knew contained materially false information, and ownership or control by a foreign government or other person that the U.S. Secretary of Commerce has determined to be a foreign adversary, unless the transaction was approved by the Committee on Foreign Investment in the United States (§ 48-24-201(7), (8), added by 2025 Tenn. Pub. Acts ch. 113).

The corporation must also keep permanent minutes and records of actions taken without a meeting, appropriate accounting records, and a shareholder record by class, with copies of the charter, bylaws, and other listed records at its principal office (§ 48-26-101).

Limited liability and piercing the corporate veil

A shareholder is not personally liable for the corporation's acts or debts, except that a shareholder may become liable because of the shareholder's own acts or conduct (§ 48-16-203(b)). In 2025, the Tennessee Supreme Court held that the three elements from Continental Bankers Life Insurance Co. of the South v. Bank of Alamo, 578 S.W.2d 625, 632 (Tenn. 1979) are the framework for piercing the corporate veil in all cases, whether the relationship is parent and subsidiary or corporation and shareholder (Youree v. Recovery House of East Tennessee, LLC, 705 S.W.3d 193 (Tenn. 2025)). In plain terms:

1. Control so complete, as to the transaction under attack, that the corporation had no separate mind, will, or existence of its own.
2. Use of that control to commit fraud or a wrong, to violate a statutory or other legal duty, or to commit a dishonest and unjust act in contravention of a third party's rights.
3. The control and breach of duty must proximately cause the injury or loss.

The Court said Tennessee courts presume corporate separateness and that piercing should be the exception, not the rule. Circumstances such as a failure to collect paid-in capital, gross undercapitalization, nonissuance of stock certificates, and diversion of corporate assets are not a separate test, but they may be relevant to the three elements. On the second element, the wrong must be more than the breach of contract alleged. Youree involved LLCs, and the Court applied the same analysis for purposes of that appeal. Records of what was paid for shares and separate corporate money and books are the kinds of facts that matter if a creditor later argues otherwise.

If you have chosen a corporation and want the charter, bylaws, share issuance, shareholder agreement, and S election timing to fit together, my office can handle the formation and organizing documents.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal or tax advice for any specific business or corporation.