Starting a business in Tennessee
As you read through this list, realize that everyone’s business is different. It is possible there are other accounts and taxes you might be subject to that are not included here. This is a good general checklist that would apply to most people. See step 1 to make sure you have all your bases covered.
Contact a CPA and attorney to help you with the setup. The cost on the front end is worth it to not have to undo things that were setup incorrectly.
Choose a business structure
The form of business determines which income tax return a business taxpayer needs to file. The most common business structures are:
Sole proprietorship: An unincorporated business owned by an individual. There's no distinction between the taxpayer and their business.
Pro: simple setup, no registration with the TN Secretary of State
Con: owners can’t be employees of the business. The net income of the business is all subject to federal income tax and self-employment tax
How you get money out of the business: owner draws (these are not an expense for the business)
Partnership: An unincorporated business with ownership shared between two or more people.
Must be registered with the Secretary of State
Most partnership types must be registered for TN Franchise and Excise tax
Partners are not able to be employees of the business.
The partnership files a separate tax return and each partner receives a K-1 to report the income on their return and self-employment tax will be due on that income along with federal income tax
How you get money out of the business: Distributions (you must have enough equity in the business to take distributions) and guaranteed payments
Corporation: Also known as a C corporation. It's a separate entity owned by shareholders.
Must be registered with the Secretary of State
Register for TN Franchise and Excise tax
Easy to move shares between owners
Owners can be employees
How to get money out of the business: Wages and dividends (dividends are not an expense to the business and are taxable to the receiver)
S Corporation: A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
Must be registered with the Secretary of State
Register for TN Franchise and Excise tax
How to get money out of the business: Officers of the S-corp are required to receive a reasonable salary per the IRS guidelines. Distributions can also be taken but it’s important to make sure distributions (not taxable) are not greater than wages or the IRS could recategorize them as wages and employment taxes will be due.
A separate return is filed for this entity type as well and each shareholder will receive a K-1. The income is not subject to self-employment tax, only federal income tax.
Limited Liability Company: A business structure allowed by state statute.
If you register with the Secretary of State as an LLC and have multiple members the IRS will automatically make you a partnership for federal taxation purposes. If you want to be a S-corp LLC you need to file form 8832 Change of Entity Type and form 2553 Election by a Small Business Corporation to get that changed.
Apply for an EIN- An EIN is also called a federal tax identification number. It's used to identify a business. Most businesses need one of these numbers. It's important for a business with an EIN to keep the business mailing address, location and responsible party up to date. IRS regulations require EIN holders to report changes in the responsible party within 60 days. They do this by completing Form 8822-B, Change of Address or Responsible Party and mailing it to the address on the form.
Register for sales tax if you are selling goods with the TN Department of Revenue.
Register for business tax with the TN Department of Revenue if you are required to. You will apply online at the link but you will also have to fill out the business tax form and take it to your local county and city offices to pay their application fee before they will completely setup the account and provide you with a business license.
Open a separate bank account for the business
Get a system in place to manage your income and expenses for tax time. I have some helpful spreadsheets available here.
Contact a CPA and attorney to help you with the setup. This is an important one, so it’s making the list twice!