A limited liability company (LLC) is a legal form of enterprise that passes through income to owners and provides them with limited personal liability from the obligations of the company. It is not quite as strong an entity as a corporation, but it affords some advantages over a sole proprietorship or general partnership for tax purposes.
There are many reasons why someone might be interested in LLCs and how they work in Tennessee. These reasons range from tax benefits to protection from personal liability. To understand what a limited liability company does and how your business will be impacted by it, you should review the following topics.
Starting an LLC in Tennessee is Easy
You might be surprised to find out that the process of forming a Tennessee LLC is very simple. It requires no more than filing articles of organization with the state, stating a registered agent and an address for service, and paying $100 in fees.
You can accomplish all this by yourself or through an online service. Just follow these steps:
STEP 1: Name your Tennessee LLC
The first step toward forming an LLC in Tennessee is to come up with a name for your company. If the name you select is not available, you will have to think of another one that will be acceptable.
You can file under any name you want as long as it isn’t already claimed by someone else, but there are rules for what names are available. You can find them in the Commercial Division of the Secretary of State’s website.
- The name must end with the legal suffix, “Limited Liability Company,” or “LLC.”
- The name can contain no more than two words.
- The first word cannot be a number.
- It must not imply anything about the purpose of the LLC.
- It must not be the same as a person’s name.
STEP 2: Choose a Tennessee Registered Agent
While you are forming an LLC in Tennessee, you will need a Registered Agent. This person is the one who will receive notices and legal documents on behalf of your company.
You can register with any secretary of state in any state, but your business should be registered in the state where it has its principal place of business. If you do not have a place of business, you should register as a foreign LLC.
Registered agent requirements:
- Must have a physical address in Tennessee.
- Must have a permanent residence and phone number.
- If he or she is an individual, they must also have a social security number.
You can easily get a registered agent service on the Internet. This is probably the easiest way to register, but you will have to pay for it.
STEP 3: File the Tennessee LLC Articles of Organization
Once you have chosen a name for your LLC and obtained a registered agent, the next step is to file articles of organization.
The fee for this is $100. If you are not going to use an online service, you can buy forms from:
- The Secretary of State at www.state.tn.us;
- Nolo Press at www.nolo.com;
- Many other legal service companies such as LegalZoom.com.
After you file these forms, your Tennessee LLC is official and you can begin operating it. You will have to pay annual registration fees each year on the anniversary date of your incorporation unless you make a formal request for relief from further payments.
To maintain your status as a Tennessee LLC, you will also need to file an annual report that tells the state what the name and address of your registered agent is for service in Tennessee. You do this by sending a postcard with this information on it.
STEP 4: Create Your Tennessee LLC Operating Agreement
The next step is setting up an operating agreement for your company. This contract will set out the rules for how you want to operate and make decisions as well as who owns which part of the business.
You will be able to create this in any way you see fit, but there are a few other matters that you must address:
- The LLC must be run by a manager or board of managers.
- The operating agreement can designate the members as managers if you want them to have this role. In this case, one member will serve as an “agent” for the LLC and manage it until all other members agree to remove him or her from that position.
- Your operating agreement must state how much each member of the LLC owns, how much money they have put into it and what each person’s role in the business is.
- You will also have to decide whether or not you want to limit a member’s liability. This means that if your business has any debts or other obligations, they can only be applied to the assets of those who are liable.
- If you do decide to limit liability, you must write this into your operating agreement and it will only be valid if there are no more than 20 members.
- Along with an operating agreement, your LLC will need a tax ID number. You can get this number through the IRS at www.irs.gov
Since Tennessee is not a common law state, your operating agreement will become a binding contract once it has been filed with the Secretary of State.
STEP 5: Get a Tennessee LLC EIN
Since you will be setting up your LLC as a separate entity, it will need its own Employer Identification Number or EIN.
EIN is a unique nine-digit number that is issued by the IRS to identify a business entity for tax purposes. This number can be obtained by filing IRS Form SS-4 with the IRS. You can get this form from:
- The IRS at www.irs.gov/businesses/small/article/0,,id=102947,00.html
- Nolo Press at www.nolo.com/products.cfm?topic=ss4
- Many other legal service companies such as LegalZoom.com and MyLLCorp.com.
Pros and cons of Tennessee LLCs
Creating a Tennessee LLC has several advantages and disadvantages.
- Since your Tennessee LLC is a separate legal business structure, your personal assets are protected from any debts that it incurs.
- The registration fees and annual reports for an LLC are far cheaper than those of a corporation or a limited partnership.
- If you have employees who need to be paid, the LLC can issue them a check every week or month without paying payroll taxes on the money.
- The LLC can also be used to transfer property from one member to another. This is called a buyout.
- Because your membership interest in a Tennessee LLC is considered personal property, members do not have to pay capital gains tax when they sell their share of the company. In fact, selling shares in an LLC is treated as an exchange of property and not a transaction involving the purchase of stock.
- Like a corporation, an LLC must have at least one member or manager.
- If the business is dissolved, all members are held liable for the outstanding debts and obligations.- In Tennessee, you cannot recover attorney’s fees in a lawsuit. This means that if you hire an attorney to sue someone who owes your business money, you will only be able to recover the money for yourself.
- If you do decide to limit your LLC’s liability, members who have a limited share of the company will have to pay more in taxes.
The cost of starting an LLC in Tennessee
While the cost of creating a Tennessee LLC varies depending on what type you choose and where you register it (whether in Memphis, Nashville, or elsewhere), your LLC may set you back $250 to $500 in registration fees. You will also have to pay an annual report fee that can range from $50 to $150.
As for legal costs, forming a Tennessee LLC is not very expensive. The average cost of having a lawyer draft the paperwork for you is$1,500 to $3,000. You can look for an affordable legal service provider in your area using our legal plan search tool.
- Annual report fee: $50 to $150.
- Registered agent: $20-$200 per year, depending on the size of your LLC, etc.
- Business license: $10-$100 per year.
Check with your city or county for more information about this cost and other regulations as they vary by location.
Separate Your Personal and Business Assets
If you start a business and keep your personal assets separate, your spouse, family or other heirs will continue to be protected if you are sued. This is the primary benefit of creating a limited liability company that you should consider before deciding whether to form an LLC for your business or not.
In addition, having a Tennessee LLC allows for flexible management of the company. An LLC, unlike a corporation, only requires one person to manage it at any given time. Additionally, an LLC can also be managed by multiple owners and members who share in taking care of the business responsibilities on a regular basis.
However, you do need to keep in mind that you still need to consider paying yourself an income for your work. If you don’t, the IRS may think that all earnings are instead attributed to the company.
As a result, there is a chance that you could have to pay taxes on every quarter, year and so forth before getting an actual paycheck. This can be avoided by making sure you receive a salary in exchange for managing the business.
1. Opening a business checking account
You will need to open a business checking account that is separate from your personal accounts. This will help you keep your business and personal assets separate.
In addition, it will keep you from accessing your personal funds – and using them for business expenses.
2. Getting a business credit card
You should get a business credit card for your company. This will also help you keep separate personal and business account information.
Additionally, it will protect the personal information that you have on file with your credit card company from being used by an unscrupulous business partner or employee.
3. Hiring a business accountant
Make sure you hire your own business accountant to keep a close eye on all financial transactions. This will help ensure that the company is running efficiently and legitimately.
In addition, having an independent party look over your finances will help you avoid any potential conflicts of interest.
Get Business Insurance for Your LLC
It’s essential to get business insurance for your LLC, even if you are the sole member of it. Business liability insurance will protect you and your business from any sort of potential pitfalls that could cause a financial loss.
If you or anyone in your business gets hurt on the job, this type of policy will help cover medical bills, lost wages and other expenses that can arise because of an accident.
This insurance is one piece in the overall puzzle of running a successful LLC business. It’s important to enroll your company in as many business classes as possible before you open your doors – this will help you stay on top of the latest information needed to make sound financial decisions for the company.
6 Ways to Form a Tennessee LLC
While creating your business online is the fastest way to form an LLC in Tennessee, it’s also not one of the most affordable. The only way that you will be able to get a very low price for forming your LLC online is if you are using a service like LegalZoom or Nolo. On the plus side, creating your business and LLC name online will allow you to do it in less than one hour.
Another way of forming an LLC is physically going to the county clerk’s office and filling out all of the necessary forms – this process takes longer but can be a lot more affordable than creating the LLC online.
Because of all of the paperwork that is involved with local filings, it will take you at least a few hours to get everything filled out and filed. The fees will also vary depending on what county you’re filing in – so make sure you know your options before deciding whether or not to go this route.
3. With an attorney:
You can also choose to work with an attorney when you are getting your LLC started. This is the most professional way of forming a business in Tennessee, and will allow you to make sure that your company is completely set up correctly from day one.
The only downside is that it will cost more money than other methods of forming your LLC.
You can also choose to get your business started in person by actually going down to the state capital and filing all of the forms – this process is free, but can take several hours.
5. By mail:
It will take longer for the paperwork to be processed if you don’t file it in person, but you can send your business paperwork by mail to the county clerk’s office. Once again, this method will be free of charge.
6. With a TIN:
You can also form an LLC without any legal counsel if you have a Tax Identification Number (TIN) for your LLC – this is usually only necessary if you have employees.
Create Your Business Website
Once you have formed your LLC, the next step is to create a website for your new business – this will be the official place where potential customers can find out about what you are doing.
When it comes time to get started on building your site, there are several things that you’ll need to do:
* Get a domain name:
While a .com domain name is ideal, you will have to shell out $12-$20 per year to own one – the good news is that there are plenty of other options available. GoDaddy is the most popular website for purchasing domain names, and will allow you to buy a .com or .net name for as little as $8.99 per year.
* Design a website:
This is the step that most people don’t want to do, but it’s essential if you want your site to stand out. There are several easy-to-use tools on the internet that will allow you to create an eye-catching site for very little money.
If you aren’t up to designing a website, then you can also use sites like Weebly, Wix, or WordPress to create an attractive website that showcases your business – these sites are free of charge but do take some time to learn how to use them.
* Be consistent:
One mistake that a lot of first-time website owners make is making changes too often on their site – this will confuse potential customers and make it look like your business is disorganized. Make sure that you hire a web designer to do all of the changes to your site, and only make updates occasionally.
Send Out a Press Release
The last thing that you will want to do when your LLC is getting started is to send out a press release – this will help give people an idea of what your business does, and will make it easier for media outlets to write about your company.
Before sending anything email, remember that every single word counts – make sure that you keep the text at a reasonable length, and make sure that you use specific keywords to get your story noticed. Here are a few tips for composing an effective press release:
Keep it short:
Don’t get too wordy with your text – just because there is room for extra doesn’t mean you need to fill it up. Saying something like “I am starting a new business, and I am looking for investors” is much better than something like “I’m starting a new business that sells t-shirts in New York City.”
Include your email address:
People are always giving out their emails when they send press releases – doing this will allow journalists to contact you if they want to write about your business. You should also include a contact number so that reporters can talk to you directly if they don’t have access to email.
Journalists look for words like “new,” “business,” and “investment opportunity” in press releases – make sure that these words are included so that the information is easy to find.
Reporters can’t always write stories about your company if they don’t have any pictures of it – make sure that your press release contains at least one image, and consider adding more.
Be honest and realistic:
Don’t exaggerate the truth or tell lies in a press release. It will backfire if you do, and it is much better to tell people upfront that you are just starting out.
Tennessee Business Licenses and Permits
Every new business needs to have a small amount of paperwork filed with the government before you can get started – this is known as getting a license or permit. The reason for this is because the state wants to make sure that all entities will follow certain rules, such as paying taxes and having adequate insurance.
You should make sure that you are familiar with all of the business requirements in your new city, town or county before you start out. Some businesses that need to apply for a license or permit include:
- Accountants – all accountants who work for other people are required to be licensed by the state.
- Advertising and marketing companies – small merchants often hire these companies to design ads and websites for them, and this is usually regulated by the state.
- Auto repair shops – unless you want to get into trouble with the law, make sure that your car repairs are done by a licensed mechanic.
- Barbershops and salons – if you work in hair care then make sure that you have a license from the state.
- Plumbing contractors – all plumbers in the state of Tennessee are required to acquire a license to do business.
- Food trucks – if you own a mobile food truck then you should apply for the proper permits and licenses.
If you run any other type of business that is physically located in Tennessee, then you will need to get a license from your local government before you can start out.
Your state may have other licenses and permits that apply to your business, so make sure that you identify what they are.
Tennessee LLC Tax Filing Requirements
All LLCs are required to file a state tax return if they make more than $500 in sales in a given year. Unlike most states, Tennessee does not provide any income tax forms for businesses; instead, the forms come from Internal Revenue Service (IRS).
If you do not want the trouble of filling out these forms yourself, then you can hire a professional to do it for you. You should use the following details to file your tax return:
- The LLC’s name, address and taxpayer ID number – all of these are found at the top left corner of your Articles of Organization.
- Your bank account information – this will allow the State’s Department of Revenue to deposit your taxes into your account.
- Your bank’s routing number and account number.
- The amount of sales tax that you owe.
If you don’t pay your sales tax on time, then the state may charge penalty fees and interest. This will only make it harder for you to raise money for your company in Tennessee.
If your business makes more than $500 in sales each year, then you are required to register with the State Department of Revenue. This process is fairly simple, and all that you will need to do is fill out an application form.
When filling it out, make sure that you add any additional information that they require – such as a list of your company’s bank accounts. The Department of Revenue will use this information to collect the sales tax that you owe the state.
All businesses in Tennessee are required to charge their customers a set amount of sales tax, and you have three rates that you can choose from:
- 6% – this is applied to most goods and services, although there are some exceptions.
- 7% – this is a higher sales tax rate that is applied to computer, telecommunications and digital goods.
- 8% – this applies to meals and other food items.
All businesses must charge the rate that is set in their local area; you cannot charge more than what the law allows.
Businesses make sure that you follow all of the state regulations before opening your doors. If you decide to take the risk, then you will have a good chance of succeeding in your new environment.
If your business hires employees, then you will have to pay taxes on their wages. The most common types of employer taxes in Tennessee include:
- Federal income tax – the IRS expects all businesses to withhold a certain percentage of each employee’s paycheck for federal income tax purposes.
- Tips and gratuities – employers are expected to pay these out to their employees, but they are not required to withhold them for the IRS.
- Unemployment tax – if your business has four or more employees that work 20 hours a week or more, then you will need to pay this state tax.
- Workers compensation insurance – Tennessee businesses that employ one or more people must carry workers comp insurance in order to stay in business.
Your state may also have other laws that you must abide by, so make sure that you are familiar with them before hiring any employees.
Although it can be complicated to start a new business in Tennessee, the benefits of starting your own company in this state far outweigh the complications.. You should use all of the available resources – both online and in-person – to get your business off the ground.
Franchise & Excise Tax Exemptions
Any business that is a member of the following organizations does not have to pay franchise or excise tax:
- Tennessee Economic and Community Development Association
- American Canoe Association
- National Rifle Association
- Society for International Hockey Research
- The United States Submarine Veterans Organization
File Your Tennessee LLC Annual Report
Your LLC is required to file an annual report with the Tennessee Secretary of State every year. This report must provide information about:
- Your business address and registered agent
- The name, mailing address, date of birth and social security number for members that are either a resident or non-resident in this state
- A list of all the company’s members
- A list of all the company’s managers and members (with their signatures)
This report will need to be filed every year on or before the anniversary date of your LLC’s formation. You can file your annual report online, by mail or in person. If you fail to provide this documentation as required, then a fee may be imposed on your LLC.
If you have any questions about starting a new business in Tennessee or need help maintaining your existing business, then you should look into hiring a professional accountant. These professionals can offer advice and support for all of your financial needs.
In Tennessee, you will find that most jobs are either classified as a “Tennessee” job or an “employment-at-will” job.
- A Tennessee job is one that requires some type of special certification to hold the position. This could be a government license or permit, but it is often something simpler like a high school diploma.
- Employment-at-will is a job that you can hire anyone to do. It is not required that the position be filled by someone with special skills or training.
Tennessee requires employers who employ more than four people for 20 hours or more per week (or three employees that work 24 hours/7 days a week) must carry workers’ compensation insurance.
The state of Tennessee monitors this requirement and can impose a stiff penalty if you do not carry the proper insurance coverage for your employees.. Be sure to check with your state’s laws before you hire new employees so that you are in compliance.
Congratulations on opening a new business in Tennessee! If you follow the guidelines described on this page, then you will be well on your way to success.
If you ever need help, then remember that Tennessee is a great place to get it.
The state has a variety of resources to offer: Local small business development centers, Small Business Development Corporation (SBDC) and Women’s Business Centers (statewide organizations that provide counseling on business planning along with training workshops for existing businesses), One-on-one counseling from a small business mentor.