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Business Types in Tennessee

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Business Types in Tennessee

 

 

In Tennessee, there are several types of organizations and determining which is right for your business is dependent specifically on your situation and needs. There is information available on the Internet which may provide you with enough information to help determine which entity type is right for your business. As for registration, Tennessee offers an online tool that allows you to file with the state electronically. The online tool is a step by step process which walks you through the filing requirements. In most cases you can do the filing (both state and federal) yourself. Additionally, at the end of this blog, I have listed some helpful links for filing your company registration documents. Please feel free to me with questions.

 

In this blog post, I will provide you with some of the more common entity types, provide some basic understanding of each entity type and also identify some pros and cons of each one. I will then provide a list of several questions to help you start thinking about what type of business structure is best for you. The entity types covered in this post are: Sole Proprietor, General Partnership, Limited Partnership, C-Corporation, S-Corporation and Limited Liability Company.

 

Sole Proprietor

The easiest and most basic business type is a sole proprietorship. You need to register your trade name and get a business license. A sole proprietor entity is basically one person running a business and all business income and losses are reported on the owner’s personal tax return. While this is the simplest type of entity to create, it offers no protection for your personal assets. In the event you or your business is sued, your personal assets could be at risk. That said, sometimes a sole proprietorship may be the right way to go. For example, if your liability is limited to a minimal amount or if any potential damages can be limited through insurance, bonding or other means, it may be the correct choice.

 

General Partnership

The basic partnership type is a general partnership. This is a partnership in which two or more people come together to form a business for profit. As a default, profits and losses are shared equally unless otherwise directed in a partnership agreement.

 

In Tennessee, It is important to note that a business partnership is formed when two or more people carry on as co-owners of a business, not when they agree to have a partnership or when it is in writing or whether it was intended to be a partnership. On May 9, 2014, the Tennessee Code governing Partnership formation was:

 

“61-1-202.  Formation of partnership.

 

  (a) Except as otherwise provided in subsection (b), the association of two (2) or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership.

 

I know, you are thinking, “Great. If I wanted to read the law, I would have gone to law school. Just tell me what it says!”. I wanted to highlight that the law clearly states a partnership is formed whether or not you specifically have intended a partnership to be formed. A partnership is likely formed once you and at least one other person work together to make money and then default partnership rules come into play. It would be prudent to put your business relationship in writing to ensure no misunderstanding ensues and the Courts interpret the partnership (and therefore profit) as being equally divided.

 

A general partnership is not a separate legal entity, which means that your personal assets are not protected from the actions of the partnership. Furthermore, a general partnership does not protect you from the actions of one of the partners. If your partner makes a poor decision creating a debt, your assets could be on the line to cover those debts.

 

Limited Partnership

A limited partnership is not a separate legal entity.A limited partnership is a partnership with two types of partners: a general partner and a limited partner. The general partner is the same as for a general partnership: a general partner’s assets are not protected from business liabilities and a general partner is responsible for running the company. A limited partner on the other hand, is both limited in liability to the extent the limited partner has invested and also limited in the participation of running the company. A good way of looking at a limited partner is that the limited partner is a passive investor. The limited partner can lose up to the amount the limited partner has invested and cannot participate in the day to day activities.

 

C-Corporation

A C-Corporation is a separate legal entity which means that personal assets are not generally subject to the debts or liabilities of the corporation. A C-Corporation is owned by shareholders. The C-Corporation must have at least one director. A C-Corporation will have a board of director which helps guide the organization for the long term and will have a CEO and or President to who oversees the day to day activities and is answerable to the board. A benefit of the C-Corporation is that shareholders personal assets are protected from debts and liabilities of the corporation. A potential downside is that income is taxed twice. The first time, income to the corporation is taxed and then a shareholder is taxed on the profit distributions. A C-Corporation also is required to have corporate bylaws, board of directors (as described above) and an annual shareholders meeting.

 

S-Corporation

The S-Corporation is formed in much the same way a C-Corporation is and then an election at the federal level is made to be treated under sub-chapter “s” of the US code. Again, the S-Corporation is a separate entity so that share holders are limited in liability up to the amount they have invested in the company. The “S” election allows “pass through” taxation or allows the corporation to be treated as a partnership and thus there is no double taxation on corporate profits. Note also however, that the S-Corporation also places restrictions on the business; for example the S-Corporation can only have 75 shareholders.

 

Limited Liability Company  

A Limited Liability Company (LLC) is a relatively recent state law creation, the first state allowing or creating it was Wyoming in 1977. The LLC is often seen as a hybrid between a sole proprietorship or general partnership and a corporation. The attempt was to take the benefits of both: the ease and benefit of pass through taxation of the partnership and the protection of corporation without the governing complexities. At the federal level, the LLC can choose to be taxed as a partnership or a corporation. This is quickly becoming the predominant entity type. That said, it is not necessarily the best.

 

Closing Thoughts:

This is a brief summary of the most common types of legal entities available. Before choosing which one is best for you, it is important to understand your business and where you want to with it and the legal and tax consequences of each entity type. I highly recommend that you speak to both an accountant and an attorney to determine which is best (This recommendation is not just because I am an attorney).

 

Filings: The registration process itself is often available online at no cost to you other than the state required filing fees. If the process cannot be completed online, often the application and filing forms are available to printout from your state’s website. An Employee Identification Number is available via the IRS website and can be acquired at no cost. Additionally, the states often have hotlines to help you if you run into a problem.

 

There are a lot of companies that will register your company and give you corporate documents. I have already mentioned that most filings are available online with no additional fees, so why pay someone to do that (I encourage my clients who are cost conscious to attempt to do it themselves and if they run into problems or have questions to call me)? Realize that you are getting a standard agreement and if you decide to go this way, read the documents thoroughly to ensure that you understand each clause.

 

Good luck!

 

 

Links:

 

State of Tennessee

            TN Smart Start Guide

            TN Registration and Company Forms

           

IRS

IRS Regarding Business Structures

Getting an EIN

 

SBA

SBA on Business Types

 

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