Those who want to start a business in Tennessee should carefully consider all the steps they need to take. If they fail to select the right legal entity type, they may face increased tax expenses or legal trouble down the road.
Entity types have changed in recent decades, so would-be business owners should not simply follow suit with existing company structures. Here are the main entity types to choose from today:
The simplest structure for a business is the sole proprietorship. This structure can work for very simple, small operations owned by one person. The owner of the business files taxes on the individual income tax return using a Schedule C. The owner must still comply with all local and county licensing requirements, as with any entity type.
Limited Liability Corporation
To own a limited liability corporation in Tennessee, business owners must first register their name with the Tennessee Secretary of State’s office and complete a filing process. An LLC can provide some degree of protection for the owner’s assets but is subject to additional taxes, including a franchise tax. An LLC can have one or more owners.
S corporations can have one or more than one owner as well, but they are typically organized when the company’s profits significantly exceed the amount that the partners receive as draws or distributions. This type of organization allows the partners to avoid paying self-employment tax on all profits of the company.
Small businesses are not created as C corporations as often as they were in the past, because there are more entity choices available. The advantage of creating a C corporation becomes apparent when the owners wish to raise money by selling different types of shares or raise venture capital.
No matter what entity choice a business owner makes, he or she must be aware of the obligations on the entity to file returns and pay taxes. The owners must file returns each year that the entity exists until it is formally dissolved. Simply ceasing operations is not sufficient; there is an obligation to file returns even if the company is not operating.