How to Start a Business in Tennessee
Tennessee, affectionately known as the ‘Volunteer State,’ is renowned for its breathtaking green mountains, vibrant country music scene, and burgeoning business opportunities. Ranked as the 14th best state in The Tax Foundation 2023 State Business Tax Climate Index, Tennessee has emerged as a haven for ambitious entrepreneurs seeking to establish or expand their ventures. Currently, the state boasts an impressive 650,000 active small businesses, with a remarkable 91,551 new businesses formed in 2022 alone! The majority of this business growth is concentrated in Shelby and Davidson counties, accounting for a significant 42.7% of all new businesses. With its favorable cost of doing business, Tennessee presents an enticing environment for aspiring business owners. So, why wait? Let’s delve into the process of starting a business in Tennessee and embark on your entrepreneurial journey.
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12 Steps to Starting a Business in Tennessee:
- Research and Plan your Business
- Choose a Business Structure
- Choose your Business Name
- Register your Tennessee Business
- Get an EIN
- Register for Tennessee Sales and Use Tax
- Apply for Business Licenses and Permits
- Open a Business Bank Account
- Set Up Credit Card Processing
- Establish an Accounting System
- Get Business Insurance
- Hire Employees and Set Up Payroll
The process towards starting a business in Tennessee demands a well-thought-of initial business plan and thorough research of the business idea. Before actually launching a start-up, conducting due diligence becomes necessary. Comprehensive market research, including analysis of your competitors, becomes essential in determining the potential factors for your business to succeed. Your research should provide a clear understanding of your target customers, your competitors, and how your product or service offers a unique solution.
When you have done your preliminary research, you can use this information to develop an in-depth business plan. Crafting a business plan is an essential part of launching and growing your new business. Despite the general view of having a comprehensive understanding of your business as a reason to forego the business plan, statistics show otherwise. In fact, according to a study by the Harvard Business Review, businesses who created a formal business plan were 16% more likely to succeed than their contemporaries who didn’t have a business plan. Therefore, putting in the effort to create a professional business plan will increase the likelihood of a successful start-up.
Recommended:Learn How to Craft a Winning Business Plan
Now, it’s time to move on to the next crucial step: selecting a legal structure for your business. It is important to carefully evaluate the level of personal liability risk you are comfortable with, determine the desired tax status, and identify your source of capital. These considerations will help you choose from the four most common types of business structures.
Limited Liability Companies (LLCs) are the most commonly adopted formal business structures for small businesses. An LLC is a distinct entity from its owners (also known as members), providing them with personal liability protection. This means that the members can rest easy knowing that their personal assets are safe if the business is sued or has outstanding business debts.
LLCs have numerous benefits, including a preferred pass-through taxation standard. However, they also have the choice to adopt C-Corporation or S-Corporation taxation standards. This flexibility is highly beneficial and is one of the main reasons why so many small business owners opt for LLCs.
Additional Information:What is an LLC and How Does it Work?
Corporations are another option for business owners who want to establish a separate legal entity. The shareholders own a corporation through a percentage of shares issued as stocks. While setting up a Corporation has benefits and disadvantages, it offers extra liability protection. However, one thing to remember is that Corporations often have higher tax rates as they must pay corporate taxes before the profits are distributed to shareholders. Overall, establishing a Corporation means taking on additional responsibilities and important decisions that can be challenging but enhance your business ventures.
Additional Information:What is a C-Corporation?
If you’re looking for the most straightforward business setup for a single-owner enterprise in Tennessee, consider a Sole proprietorship. Sole proprietorships require no formal paperwork or registration is outside of the required business licenses and permits. But it’s important to note that while it’s inexpensive to start, sole proprietorships don’t offer liability protection. In case of legal problems or accumulated business debts, creditors can go after the owner’s assets to cover the losses. It’s a good idea to weigh the pros and cons of this business structure before making a final decision.
Additional Information:What is a Sole Proprietorship and is it a good fit for your business?
When two or more people co-own a business, the simplest structure is a general partnership. It’s like LLCs in that they benefit from pass-through taxation – this means they don’t pay taxes directly. Instead, they pass profits or losses on to their owners, who then pay taxes on them.
General partnerships are also an informal legal structure, just like sole proprietorships. This means the business isn’t seen as separate from its owners in the eyes of the law. However, this has a significant downside. Members of the partnership have unlimited personal liability for their actions, leaving them open to risks associated with the business.
Additional Information:Partnerships Defined
Need More Info to Choose a Structure?
If you need more detailed information to make choice for the right business structure for your business check out our guide: Business Types: How to Choose a Business Structure
Now that you’re well-informed about legal structures, it’s time to shift our focus to the next step: choosing a great name for your Tennessee business. While you may be tempted to go with the first thing that comes to mind, thinking that your product or service is what matters most, remember that the name is what initially grabs attention. In fact, the choice of name can significantly impact the success of your business, as it plays a crucial role in your marketing efforts once your business is established. Therefore, it’s worth taking the time to select a good name.
If you find yourself lacking creativity and struggling to come up with suitable names, consider the three essential ingredients of a great business name: creating an identity, being memorable and easy to recall, and being easy to search and find. For a comprehensive guide on creating a remarkable business name, be sure to check out our resource: How to Come up with a Business Name
Following the choice of business structure and name, you must now turn your attention to getting your business in Tennessee officially registered. The procedure for this varies based on the business structure, so let’s go over each briefly.
- Register a Tennessee LLC
- Register a Tennessee Corporation
- Register a Tennessee Sole Proprietorship
- Register a Tennessee Partnership
Tennessee LLCs are formed by filing a document known as Articles of Organization with the Tennessee Secretary of State, which has a filing fee of 300. Before doing so, you must determine if the name you have chosen is not already in use. You can do this by completing a Tennessee business name availability search. Once verified, you can file the Articles of Organization. The filing must include the LLC’s legal name, the owner(s) contact information, address, and a designated Tennessee registered agent. While not legally required, you will also want to create an operating agreement to establish the basic rules of how your LLC will function, list ownership percentages, and detail voting rights.
Learn How to Start an LLC
If you want your business started as an LLC, check out our comprehensive guide: Steps to Starting an LLC in Tennessee. This resource provides detailed information and expert insights to help you navigate each step of the LLC formation process successfully.
To form a Corporation in Tennessee, you must file a document called For-Profit Corporation Charter with the Tennessee Secretary of State, which has a filing fee of 100. Additionally, you will need to appoint a registered agent who will be able to collect service of process documents. Designing the bylaws and internal rules for operations is a key way that you can make sure your organization is set up for success.
At the state level, no formal filings are necessary to start a Tennessee sole proprietorship. Sole proprietorship owners are required to include their name in the business name. If you wish to carry out your business under a name that does not include your last name, you will have to register a Tennessee DBA, formally known as an Assumed Name, with the county.
Similar to sole proprietorships, general partnerships do not require the filing of any official documents to be set up. Also, they must apply for an Assumed Name if they plan on doing business under a name that does not include the partners’ names. It is also recommended that the partners create a partnership agreement as it settles many arguments before they arise and outlines a few technicalities such as power distribution and the decision-making process.
Once you have taken the steps to legally form or establish your business, you want to get an EIN. An EIN (an acronym for Employer ID Number) is an IRS identification number for tax filing and employment purposes. You can think of an EIN as the business equivalent of a social security number. Any business formed as a Corporation, Partnership, or LLC is required to obtain an EIN. Even if your business is not required to get an EIN, it’s highly recommended that you apply for one. EINs are required for many business filings and can be used in place of providing your SSN, which can help protect against identity theft.
How to Apply for an EIN
If you have an SSN you can apply for an EIN directly with the IRS for free using the Online EIN Assistant. If you are having trouble or don’t have an SSN you can use Northwest Registered Agent’s EIN service to obtain your EIN.
The state of Tennessee imposes a sales tax rate of 7% across the entire state. However, the overall sales tax rate can go up to 10% depending on the city or county due to local tax rates. If your business has a sales tax nexus in Tennessee, you sell taxable goods or services to Tennessee residents, or your buyers are required to pay sales tax, it is necessary for you to collect and remit sales tax in Tennessee. Failure to fulfill this responsibility may result in penalties and interest charges.
How to Know if you need to collect Sales Tax in Tennessee?
The Tennessee Department of Revenue states that a business establishes sales tax nexus in Tennessee when it has a physical presence in the state, including:
- Having a physical location in Tennessee such as an office, distribution point, sales center, warehouse, or temporary site.
- Engaging in construction contracts in Tennessee
- Engaging in trade shows or having company representatives participate in trade shows.
- Delivering goods within Tennessee using trucks owned by the company.
- Independent sales representatives, employees, or agents conducting business in Tennessee, including selling, delivering, or taking orders for taxable items.
- Directly or indirectly furnishing taxable services in Tennessee
- Having possession or leasing physical assets situated in Tennessee.
- Having a subsidiary with a physical presence in Tennessee
- Assembling, installing, servicing, or repairing products in Tennessee.
- Maintaining inventory in Tennessee using a third-party fulfillment service, which includes Amazon’s FBA service.
If a business without a physical presence in Tennessee has generated sales revenue exceeding $100,000 in the state over the past twelve months, it must also collect and remit sales tax to the Tennessee Department of Revenue.
For more detailed information visit the Tennessee Department of Revenue: Sales and Use Tax page or contact a qualified Tennessee tax professional.
Get Help Registering for Tennessee Sales and Use Tax
If you’d like assistance registering for Tennessee Sales and Use Tax you can use Swyftfilings Seller’s Permit service to complete your registration.
To ensure legal compliance with federal, state, and local laws, it is important for your business to obtain one or more business licenses and/or permits. The specific licenses and permits required will vary depending on various factors, such as the nature of your business, the products and services you offer, the data you collect, and your location. It is crucial to understand and adhere to these requirements to operate your business smoothly and within the bounds of the law.
Federal Licenses and Permits
Your business may need a license or permit to operate legally if your business is involved in an activity that is regulated at the federal level, such as:
- Alcoholic beverages
- Firearms, ammunition, and explosives
- Fish and wildlife
- Commercial fisheries
- Maritime transportation
- Mining and drilling
- Nuclear energy
- Radio and television broadcasting
- Transportation and logistics
For more detailed information on federal business licenses and permits visit the Small Business Administration: Federal Licenses and Permits page.
State and Local Licenses and Permits
Tennessee does not have a general business license at the state level, but local licenses are often required.For more detailed information visit the TN Department of Revenue Business License page.
Tennessee Business License Research
Figuring out what business licenses you’ll need can be pretty complicated. You can use MyCorporation’s Business License Compliance service for expert help to determine which licenses you’ll need.
It’s essential to separate your business transactions and personal transactions to protect your personal assets. Mixing your personal and business banking activity is known as “co-mingling funds” and can cause your business severe problems. Not only does this make bookkeeping and accounting much harder, but it can also result in losing your limited liability status if you’re an LLC or Corporation. If you mix your personal and business funds, you can put yourself at serious legal risk if your business is sued by piercing the corporate veil.
By opening a dedicated business bank account and use it strictly for business activity, you can avoid these risks. To learn more about opening a business bank account, visit our detailed how-to guide. Our guide “How to Open a Business Bank Account” goes over how to choose a bank account provider and the documents you’ll need to open your account.
For most businesses, it’s vital to accept credit card and debit card payments. Credit and debit cards now represent around 60% of all transactions over $10. As a result, accepting card payments is basically a requirement to stay competitive in the modern business environment.
For more information, see our guide, How to Accept Credit Card Payments
Setting up an accounting system allows a business to track business expenditures and create reports to gain insight into your business’ performance. By establishing an accounting system, you can quickly and easily create budgets, manage cash flow and generate the required financial reports to know how your business is doing.
For a more in-depth breakdown, visit our Small Business Accounting 101 guide. Covered in the guide are the steps to do small business accounting, including how to choose between cash basis and accrual basis accounting methods.
Recommended Accounting Software
We recommend using Freshbooks for your accounting needs. Freshbooks allows you send professional invoices, take online payments, timetrack and more.
One of the most overlooked aspects of starting a new business in Tennessee is obtaining business insurance. Having the proper business insurance coverage helps to mitigate your risk so that you’re covered in the event of an accident, natural disaster, or lawsuit.
In our Small Business Insurance Guide, we go over the six types of business insurance so that you can make sure you’re covered.
If you want help running your business, you’ll want to consider hiring employees and setting up a payroll. Employers are responsible for reporting new hires and verifying their employment status.
There are two items that employers must complete to be federally compliant when hiring new employees. You must verify that any employee is eligible for employment in the US and obtain a signed IRS Form W-4 to ensure you are withholding the correct amount for federal taxes. For more detailed information, visit the IRS page for Businesses with Employees.
Since Tennessee has a state level income tax, you’ll need to withhold taxes from your employees and remit them to the state. In addition to this you’ll also need to register for unemployment insurance. Luckily in Tennessee both of these registrations are done with the None. For more specific information about your requirements as an employer in Tennessee visit the TN.gov: Labor Laws page for more info.
Recommended Hiring Software
If you’re hiring employees we recommend using Gusto. Gusto can not only automate your payroll but also help with hiring & onboarding, file employment taxes, aid with compliance and even identify hidden tax credits for your business.