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Tennessee is enjoying rapid growth, as Americans migrate to the state from other parts of the country, drawn to Tennessee’s low cost of housing, major factories, and competitive corporate tax rate. Setting up as an LLC is a great way to start a business in the Volunteer State. Here are 12 steps to make it happen.
How to start an LLC in Tennessee
- Choose a business idea for your LLC
- Name your Tennessee LLC
- Create a business plan
- Get an employer identification number (EIN) and a state sales tax number
- File Tennessee articles of organization
- Choose a registered agent in Tennessee
- Obtain a business license and permits
- Understand Tennessee state tax requirements
- Prepare an operating agreement
- Examine business insurance options in Tennessee
- Understand financial considerations
- Market your LLC
What is an LLC?
LLC stands for limited liability company. LLCs are business organizations run by one or more LLC owners—i.e., LLC members—who control their company’s operations without the oversight of a corporate board of directors. Managing members control day-to-day operations, whereas non-managing members hold an ownership stake but don’t actively participate in the business’s everyday activities.
Tennessee recognizes single-member LLCs (one owner), multi-member LLCs (multiple owners), and is one of the few states to recognize series LLCs—a business entity that collects multiple LLCs under one master LLC, and can file taxes on behalf of its subsidiaries, or “series.” (The master LLC and its series are treated as separate entities concerning debts, liabilities, obligations, and expenses.)
Is an LLC right for you?
When considering business structure, Tennessee small business owners often gravitate to LLCs, which straddle the line between sole proprietorships, which are simple to organize but offer few tax or liability benefits, and corporations, which offer many business benefits but can be difficult to set up and maintain. Here are the three main advantages of setting up an LLC:
- Personal asset protection. An LLC shields your assets from creditors or litigants. Faced with a lawsuit, the legal structure of an LLC protects you from personal liability. It also keeps your personal finances separate from your business finances, meaning you won’t go bankrupt if your LLC defaults on its debts.
- Avoiding double taxation. An LLC is considered a “pass-through” entity. That is, it passes its profits and losses through the company to individual co-owners, allowing the company to avoid double taxation, i.e., personal and business taxes. The pass-through structure also means that if your LLC loses money during a business year, you can claim a deduction on your personal income taxes.
1. Choose a business idea for your LLC
The first and most crucial step in starting an LLC is developing a solid business idea, which usually doesn’t happen overnight. You may already have an idea or two rattling around in your head. Maybe all you’re missing is the confidence to launch your idea into the world. Starting a business is, after all, no walk in the park. It takes time and money. Here are two questions you can ask yourself to find your footing and start making moves:
- Who is your customer? Understand your target market, i.e., potential customers. Without them, there’s no business. Analyze similar companies, or marketplaces, like Amazon, where similar products or services are sold. Insights on industry trends can give you a better sense of your position within the market.
- What’s your projected profitability? Your business’s survival depends on its profitability—its ability to yield a financial gain. It isn’t enough to simply make money. You have to earn more than you spend over the long term. How many products or services do you need to sell to cover your costs and turn a profit? Will your products or services be bundled or packaged? Does a subscription model make sense?
2. Name your Tennessee LLC
Your Tennessee LLC needs a business name. A good name is essential to building brand recognition—it’s your customers’ first impression and hints at your offerings. Shopify’s business name guidelines can help your selection process. As you brainstorm LLC names, keep the following in mind:
- Register an original business name. Once you’ve picked a business name, confirm that another Tennessee business hasn’t claimed it. The Tennessee Secretary of State provides an online business name availability tool. Once you find an available name, file Tennessee Form SS-9425: Application for Name Reservation. You can mail your form or submit it through the state’s online portal. The filing fee in both cases is $20. Note that Tennessee requires an LLC to include the phrase “Limited Liability Company” or its abbreviations (“LLC” or “L.L.C.”) in its official business name.
- Explore a DBA. DBA stands for “doing business as.” The term applies to companies that organize under one legal name but interface with customers using a different business name. For instance, East Mountain Properties LLC could use Whistling Wind Motel as a DBA. To use a DBA, register an assumed name with the state of Tennessee for $20. Shopify offers additional resources on the DBA meaning and process.
- Register a domain name and social media handles. Ideally, your online domain name and social media handles align with your business name or DBA. Try Shopify’s domain name generator to accelerate your search.
3. Create a business plan
Entrepreneurs use business plans as roadmaps for success. A strong business plan declares organizational objectives, analyzes the target market, products and services, outlines the organizational structure, plans revenue streams, and determines metrics for success. Shopify’s business plan template demonstrates how to craft a plan specific to your LLC. For further guidance, look at existing business plan examples as a framework for your plan.
4. Get an employer identification number (EIN) and a state sales tax number
All Tennessee LLCs must obtain an employer identification number (EIN) through the Internal Revenue Service. An EIN serves as your business’s federal tax number. In many ways, it mimics the functions of a Social Security number (SSN), except for businesses instead of individuals. You’ll need the EIN to hire employees and to set up a business bank account for your LLC. With your EIN, you can obtain a state sales tax number from theTennessee Taxpayer Access Point (TNTAP). You’ll need both tax numbers to accept payments.
5. File Tennessee articles of organization
All LLCs in Tennessee must file articles of organization with the Secretary of State’s office. The state charges $50 per LLC member, with a minimum filing fee of $300 and a maximum filing fee of $3,000. This means that the total cost of establishing and maintaining an LLC in Tennessee varies depending on the number of LLC members (both managing and non-managing).
When registering with the state, you’ll receive a Tennessee Secretary of State control number, which you’ll use to make business filings. Chief among these is an annual report that you can file online. Each annual report costs the same as your initial filing fee: $50 per LLC member, with a minimum fee of $300 and a maximum fee of $3,000.
6. Choose a registered agent in Tennessee
All Tennessee LLCs must declare their own registered agent to accept tax documents and legal forms on behalf of the business. The registered agent must maintain a physical street address within the state. You can select an LLC member as a registered agent or hire a registered agent service. Note that Tennessee places no residency requirements on LLC owners—only registered agents must reside in-state.
7. Obtain a business license and permits
Whether you’re an individual or business entity in Tennessee, you’re subject to business licensing and permitting regulations. Many licenses are issued at the county level. The Tennessee Department of Revenue provides information to get you started. Common Tennessee business licenses include:
- Minimal activity license. Tennessee businesses with gross receipts of more than $3,000 but less than $10,000 must obtain a minimal activity license from their local county clerk. The registration fee is $15.
- Standard business license. Tennessee businesses with gross receipts exceeding $10,000 must obtain a standard business license from the local county clerk. The registration fee is also $15.
- Sales tax certificate. Tennessee LLCs must collect sales tax on merchandise sold. To get a sales tax certificate, create an account on the Tennessee Department of Revenue website and follow the prompts.
Other Tennessee business licenses and permits vary depending upon your work. Many industries require special certification, including architecture, accounting, insurance, home inspection, and cosmetology. Consult the Tennessee Department of Commerce & Insurance website for details.
8. Understand Tennessee state tax requirements
Tennessee LLC owners must pay taxes and fees to the state, in addition to any federal taxes they may be liable for. Taxes levied on Tennessee LLCs include:
- Franchise tax. Tennessee LLCs must pay an annual franchise tax, which can be filed and submitted online. Tennessee calculates its franchise tax rate by assessing “0.25% of the greater of net worth or real and tangible property in Tennessee.” At a minimum, LLCs must pay an annual franchise tax of $100, regardless of net worth or revenue.
- Sales tax. Like all business types, LLCs must collect sales tax and remit it to the state. Tennessee levies a 7% tax on merchandise sales. Many local municipalities add their taxes, leading to a 9.55% average tax on Tennessee retail sales, one of the highest rates in the nation.
- Corporate tax. Tennessee LLC owners can choose to have their company taxed as a corporation. The state charges a 6.5% excise tax on corporate profits, which LLCs can pay instead of passing LLC profits and losses to individual owners. This tax approach often appeals to companies whose members don’t want company profits increasing their personal tax obligations.
9. Prepare an operating agreement
An LLC does not need an operating agreement to do business in Tennessee. Still, many LLC owners choose to draft operating agreements to provide structure and protect membership interests. An operating agreement essentially serves as your LLC's constitution. Agreed to and signed by all LLC members, an operating agreement typically outlines:
- Your LLC’s name and primary address
- How long you plan to run the LLC
- Information on the LLC’s registered agent
- Information about the articles of organization
- The business’s purpose and mission statement
- Organizational chart listing members and their respective investments in the LLC
- How profits and losses will be divided between the members
- The process for admitting new members and offboarding outgoing ones
- An overall management plan for the LLC
- Various indemnification and liability provisions
10. Examine business insurance options in Tennessee
Although LLCs offer a degree of personal asset protection, you may still want to purchase insurance to shield your business against costly mishaps. Some types of insurance, like workers’ compensation insurance, are required by state law, while other policies are not mandated but may be required by other entities like landlords or lenders.
In many cases, Tennessee LLC owners purchase higher levels of insurance coverage than the law mandates. The Tennessee Department of Commerce & Insurance provides resources for exploring different small business insurance policies. Common policies include:
- Workers’ compensation insurance. Tennessee requires all businesses with five or more employees to purchase workers’ compensation insurance to cover their on-the-job injuries.
- Commercial general liability insurance. Commercial general liability insurance, or CGL, protects LLCs from financial claims involving property damage, bodily injury, libel, slander, and misleading advertising.
- Commercial automobile insurance. If you own a vehicle in Tennessee, it must be covered by vehicle insurance, whether it’s used for commercial or personal purposes.
- Unemployment insurance. As a Tennessee employer, you pay into an unemployment insurance policy, which pays employees laid off through no fault of their own.
- Cyber liability insurance. Cyber liability insurance protects against financial losses from cyberattacks and data breaches. You may find this coverage invaluable if your business collects customers' credit card numbers or other personal information.
- Commercial umbrella insurance. Umbrella insurance adds to your existing insurance coverage and extends maximum payouts. Your umbrella policy can cover the remaining balance if your regular insurance limits don’t cover massive loss or liability.
11. Understand financial considerations
As you launch your Tennessee LLC, you’ll need to choose a financial institution to handle your company’s monetary transactions. Traditionally, this means opening a business bank account at a commercial bank or a credit union.
Several Tennessee agencies connect business owners with funding, grants, and information about tax benefits, including the Tennessee Small Business Development Centers network and the Tennessee Department of Economic and Community Development. You can also look to the US Small Business Administration for resources. It maintains an office in Nashville that covers the entire state. Meanwhile, a merchant support service like Shopify Capitalcan connect you to lenders and investors.
12. Market your LLC
As you tick off the legal requirements for starting an LLC in Tennessee, you can pivot to the marketing and brand-building process. LLC startups must choose color schemes, slogans and taglines, fonts, logos, and a brand voice for written materials. These components end up in marketing initiatives, including:
- TV and radio ads. While pricey, this traditional advertising exposes your company to a broad audience.
- Social media influencer campaigns. An LLC may choose to pay a social media celebrity to promote a product or service to their large following.
- Store displays. Some LLCs pay to post displays in retail stores to inform customers and draw attention.
For more information, check out Shopify’s small business marketing guide to learn the basics of building an online audience, fostering customer relationships, and winning new customers.
Starting an LLC in Tennessee FAQ
How much does it cost to start and maintain an LLC in Tennessee?
Tennessee charges LLCs between $300 and $3,000, depending on the number of LLC members, to file the initial articles of organization. You'll then need to file an annual report with the state, which costs between $300 and $3,000 (again, depending on the number of LLC members). Business owners must also pay an annual franchise tax, assessed as “0.25% of the greater of net worth or real and tangible property in Tennessee.”
What are the pros and cons of establishing your LLC in Tennessee?
Tennessee boasts a growing population, a comparatively low cost of living, and a tax structure that favors business and property owners. The Tax Foundation rates Tennessee as the eighth best tax climate for business owners. Still, Tennessee has one of the highest sales taxes in the country, making it an expensive place for consumers.
Do you need a registered agent for your LLC in Tennessee?
Yes. All Tennessee LLCs must designate a registered agent who maintains a physical address in the state. An LLC’s registered agent must be available during regular business hours to receive documents and mailings on behalf of the LLC.
How do state taxes work for LLCs in Tennessee?
LLCs use IRS Schedule K-1 to report annual profits or losses, which are then proportionally divided among owners based on their company ownership stake. A Tennessee LLC passes its profits and losses through to its members, who declare these gains or losses as part of their personal income tax filing. A Tennessee LLC can choose to be taxed as an S corporation, which means the state taxes profit at Tennessee’s corporate rate of 6.5%. LLC owners must also collect and remit Tennessee’s 7% sales tax on retail purchases and additional sales taxes imposed by individual localities.