If you’re thinking of starting a business in Tennessee, you need to decide the right structure for your business. The structure you choose will have a significant impact on how you operate, manage, and ultimately grow your business.
Like any decision in life, choosing the right business structure is not a one-size-fits-all process. Goals and needs for the business are important, and you want to make sure you do your homework as far as taxes, compliance and a host of other issues are concerned.
That’s where we come in to help. We can provide you with the legal expertise, guidance, and support you need to choose and form your ideal business structure, as well as handle all of the necessary paperwork, documentation, and compliance requirements.
There are four main types of business structures in Tennessee: sole proprietorship, partnership, corporation, and limited liability company (LLC).
- Sole proprietorship: This is the simplest and most common type of business structure. It is a business owned and operated by one person. A sole proprietorship does not create a separate legal entity from the owner, which means that the owner and the business are one and the same. The main advantages of a sole proprietorship are that it is easy and inexpensive to start and maintain, that it gives you complete control and flexibility over your business, and that it offers tax simplicity. The main disadvantages are that it exposes you to unlimited personal liability and can limit financing and growth potential.
- Partnership: A partnership is operated by two or more people, who share the profits and losses of the business. There are three types of partnerships: general partnership, limited partnership, and limited liability partnership. Each type has its own wins and opportunities:
- General partnership: In a general partnership, all the partners have equal rights and responsibilities in managing and running the business. All the partners are also personally liable for all the debts and obligations of the business, as well as any lawsuits or claims against the business.
- Limited partnership: Limited partners are passive investors who do not participate in the management or operation of the business. They are also not personally liable for the debts and obligations of the business beyond their investment amount.
- Limited liability partnership: A limited liability partnership offers protection to the partners from the debts and obligations of the business. In a limited liability partnership, none of the partners aren’t personally liable for the debts and obligations of the business unless they are caused by their own negligence, misconduct, or fraud. However, they are still personally liable for their own actions and those of their employees. The big win here is tax simplicity. The main disadvantages are that you’re on the hook if you have any conflicts or disagreements with your partners, so you need to consult with an expert about any liabilities now, and down the line.
- Corporation: A corporation is a business that is a separate legal entity from its owners. A corporation has its own rights and responsibilities, as well as its own assets and liabilities. A corporation is run by a board of directors, who are elected by the shareholders, and a management team, who are appointed by the board of directors. There are two types of corporations: C corporations and S corporations.
- C corporation: In a C corporation, the shareholders are not personally liable for the debts and obligations of the corporation, unless they are caused by their own negligence, misconduct, or fraud. However, the corporation is subject to double taxation, which means that the corporation pays taxes on its income at the corporate tax rate, and the shareholders pay taxes on their dividends at their individual tax rate.
- S corporation: An S corporation is a type of corporation that elects to be taxed as a pass-through entity, which means that the corporation does not pay taxes on its income. Instead, the income and losses of the corporation are passed through to the shareholders, who report them on their personal income tax returns and pay taxes at their individual tax rates. However, an S corporation has some limitations and restrictions, such as the number and type of shareholders, the type and amount of income, and the type and amount of deductions. The main advantages of a corporation are that it limits your personal liability, that it enhances your financing and growth potential, and that it provides continuity and transferability. The main disadvantages of a corporation are that it is complex and expensive to start and maintain, that it may subject you to double taxation or limited flexibility, and that it may cause potential conflicts and loss of control.
- Limited liability company (LLC): A limited liability company (LLC) is a business that combines the features of a partnership and a corporation. An LLC is a separate legal entity from its owners, who are called members. An LLC offers the flexibility to choose how it is taxed, either as a pass-through entity like a partnership or an S corporation or as a separate entity like a C corporation. An LLC also offers the protection of limited liability to its members, who are not personally liable for the debts and obligations of the LLC unless they are caused by their own negligence, misconduct, or fraud. The main advantages of an LLC are that it offers flexibility and protection, that it is relatively easy and inexpensive to start and maintain, and that it avoids double taxation. The main disadvantages of an LLC are that it may have limited financing and growth potential, complex tax and compliance issues, and lack of continuity and transferability.
Factors to Consider When Choosing a Business Structure
Let’s think through what makes sense for building a business in Tennessee.
- Liability: How much risk are you willing to take on for your business?
- Tax: How much income do you expect to make from your business and how do you want to distribute your profits and losses among your owners?
- Growth: How big do you want your business to be and how fast?
- Control: How much control do you want to have over your business and how much input do you want on decisions and changes?
- Funding: Where is the money coming from and how do you expect to compensate both the stakeholders and the employees?
- Compliance: How much time and money do you want to spend on complying with the state and federal laws and regulations that govern your business?
A law firm can help you evaluate the pros and cons of each business structure, as well as the legal and tax implications of each option.
Steps to Form Your Business in Tennessee
You’ve done the hard work – defining the structure. Once you have chosen your business structure, you are ready to form your business in Tennessee. Here are next steps:
- Register your business name and structure with the Tennessee Secretary of State, as well as with the county and city where you operate. Use the online business resources and registration portal provided by the Secretary of State to file your formation documents, search for available business names, and access other useful information and services.
- Obtain the necessary licenses, permits, and insurance. You can use the Tennessee Smart Start Guide and the Tennessee Business License Search to determine what licenses and permits you need and how to apply for them. You will also need to protect your business from potential risks and liabilities by obtaining the appropriate insurance coverage.
- Set up your tax accounts and filings. Set up your tax accounts and filings with the federal, state, and local governments, depending on your business structure and income. You will need to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), which is a unique identifier for your business. You can apply for an EIN online, by mail, by fax, or by phone. You will also need to register for the Tennessee tax accounts that apply to your business, such as the corporate income tax, the franchise tax, the sales and use tax, and other business taxes, which you can do online or in-person.
Let’s wrap up.
Choosing and forming your business structure in Tennessee is important. We’ve discussed your strategy and goals, as well as the steps you need to take with the state to be a success.
Get Help – Choose The Crone Law Firm, PLC
If you have any questions or need any assistance with your business formation in Tennessee, please feel free to contact us. We are a law firm specializing in business formation in Tennessee, and we are ready to help you with your business needs. We look forward to hearing from you and working with you on your business journey in our great state.