You might have a business plan, a great idea, and financing set up.
But you are not officially a business until you register with the state and your local government, and get set up legally.
The first step, of course, is to choose a name. Search the name of your business through the Tennessee Secretary of State’s Office to make sure it isn’t already taken.
Define Legal Structure
Your legal structure will determine your liability and taxes, as well as the ease or difficulty for growth. If you are not ready to choose yet, you can always reserve your name by filing a Name Reservation Form with the Tennessee Secretary of State office.
The options:
Sole Proprietorship
Only you own the business. It is the easiest and cheapest, and owners receive all income or keep to reinvest.
However, the owner is personally responsible for losses and debt, and personal assets are fair game in recouping debt, owed taxes or lawsuits.
Also, sole proprietorships are hard to scale, and difficult to monetize for sale.
Example: stand at a farmers market.
General Partnership
This is when your business is owned by you along with one or more other individuals. GPs must fill out a form SS-4514 with the Secretary of State.
Like sole proprietorships, GPs are relatively simple and cheap to form. But also like them, partners are personally liable for debts and lawsuits. And they share profits, but also share losses: each partner is equally liable for each other’s actions. It is more difficult to change ownership, should you want to leave the business.
Example: two-person law firm
Limited Partnership
This is when your business has one or more general partners and one or more limited partner. Profits are shared among partners.
Limited partners’ personal assets are generally less vulnerable in a legal action against the business, while general partner’s are. Changing ownership can also be difficult.
Example: restaurant with ‘silent’ partner who invested money.
Limited Liability Partnership
This is basically a GP with some limited liability. It is halfway between a GP and a limited liability company. New business rarely begin as LLPs. They generally protect partners from each other’s professional legal problems, such as negligence or malpractice. Usually, LLPs are restricted to each partner being licensed in the partnership’s field.
Example: larger law firm, CPA firm
Limited Liability Company
LLC’s are halfway between a partnership and a corporation. Owners are called members, and they have limited liability for debts and the LLC’s actions.
At the same time, taxes on the business’ income- like in SP, GP and and LLP are pass-through, meaning they are paid by the members/partners personal tax return.
Setting them up can be difficult and expensive. The State of Tennessee recommends hiring a lawyer or CPA to do so.
Example: real estate developer, retail store
Corporation
The business is an entirely separate legal entity from its operators and owners, though they receive its profit as salary and dividends.
Shareholders own the corporation, and there are two general types of corporations: C and subchapter S.
While there is no liability, corporations are complex legally- there is more paperwork to comply with local, state, and federal regulations.
C or Standard –
- Taxed twice: Shareholders pay taxes on their earnings and the corporation also pays its own taxes.
- May be domestic or foreign and works for large groups of investors
Subchapter S (aka Small Business Corporation, file with IRS) –
- Can avoid paying taxes twice by passing items to shareholders
- Must be domestic and limited to no more than 100 citizen or legal resident shareholders
Register
Once you decide, you can register your business with the state, here.
To then apply for permits and licenses to operate in a specific town or county, you need to contact the specific municipalities, which are indexed here for counties and here for cities.
Please join our FREE Newsletter
