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Tennessee Business Center - Setting Up Your Business
<< Go BackYou know what type of business you want to start. You have your business plan in hand. Now, you must decide on your business’s legal form of existence.
You must select from one of several options for your business. You can set up as a personal identity in which your business does not exist apart from you, the owner. Or, you can set up as a corporate identity in which the business exists in its own right. Or, you can set up as a limited liability which is a combination of the two.
This is an important decision that affects your ownership options, personal liability, tax structure and administrative requirements such as recordkeeping. This is one area where you and your management team would benefit from qualified legal counsel.
Tennessee wants to help you make an informed decision, one that is best for you and your business venture. Chapter Two covers the most common forms of organization that entrepreneurs ask about.
How to Set Up Your Business - Legally
One of the first decisions you must make is choosing your business’ legal form of existence. This is an important decision. Take your time, do your homework and be prepared to select the legal structure that is best for your situation. Choose from a personal identity, a corporate identity or a limited liability.
Personal Identity
Using your own identity is the simplest way to set up your business. As an individual, you can set up a sole proprietorship or a general partnership. Note that if you choose not to incorporate, you automatically fall into this personal identity category.
Sole Proprietorship. As a sole proprietor, you only need to obtain a business license from the county and/or municipality in which you operate. Your business has no existence outside of you, the owner.
- You own the assets of the company.
- You are responsible for all debts incurred by conducting business.
- You have personal liability for all actions undertaken in the name of the business.
- You reap the benefits of your success.
Sole proprietors do not pay corporate income taxes. Your net income from the business is reported as ordinary income.
If you decide to sell your sole proprietorship business, in actuality you are selling the assets of the business. You would have to close out your business license and the new buyer would have to obtain all appropriate licenses and accounts in his or her name.
General Partnership. If you have two or more owners who bear personal and unlimited responsibility for the operations and liabilities of the business, you have a general partnership.
A general partnership may be considered when neither individual can operate the business alone. Each partner should bring specific advantages to the business. Each partner should provide capital, industry knowledge, labor or physical assets to the business.
Note: Each partner is responsible for the acts of other partners when they act in the name of the business. That is, business, income and sales taxes are the responsibility of every partner. For federal income taxes, partners must file returns on Form 1065. The use of an outside accountant for recordkeeping is recommended to avoid suspicions or doubt among partners.
Partnerships do not have a corporate identity; therefore, they closely align with the hopes and dreams of you and your partners. The key to an effective business relationship is shared expectations.
- Partnership Agreement. Before making a decision to have a general partnership, you and all the partners should agree to the requirements of the business as well as the expected results. This should be written up as a partnership agreement. While it is difficult to generalize about the contents of a partnership agreement, all agreements should address the most important areas.
- Expectations of Each Partner. Discuss expectations with your partners:
Do they want to grow a company to operate?
Do they want to grow a company to sell short-term?
How will profits be distributed?
100% to partners? Part to the business, the rest to partners?
What percentages?
Are the partners agreed on the nature of the business?
- Contributions by Each Partner. Each partner should contribute value to the business and each partner must recognize the value of the others’ contributions. Determine ahead of time who will contribute cash, labor, industry experience and knowledge, sales leads, loans or guaranties.
- Responsibilities of Each Partner. Responsibilities may differ from contributions, so be sure to define the partner’s individual responsibilities as well as the group responsibilities.
Who can sign debt instruments for the partnership?
Who determines compensation, salaries, draws or profit sharing?
Who will handle the record keeping?
If required, who oversees recruitment to, or dissolution of, the partnership?
Who can make amendments to the partnership agreement?
In all cases, the Partnership Agreement should be a written notarized document. A lawyer can draw up the agreement and act as a facilitator to cover points not previously included.
Corporate Identity
A business assumes a corporate identity when you register or “incorporate” with the Tennessee Secretary of State.
Incorporation. Incorporation gives your business a legal existence. That is, it can own assets and conduct business in its own name. Part of the requirements for a corporation include:
- Having a board of directors and corporate officers.
- Having stockholders as owners of the company.
- Holding periodic board meetings, maintaining board minutes and approving corporate resolutions.
- Allowing the board to authorize certain actions such as borrowing money, entering into contracts and allocating corporate resources beyond routine business transactions.
Corporations pay federal taxes at a higher rate than a sole proprietorship. As a corporation, you are liable for both the state corporate franchise and excise taxes (see Chapter Three for details). Corporations do shield you and the stockholders from personal liability from any lawful activities.
S Corporation. If your business is an eligible domestic corporation you can avoid double federal taxation (paying taxes to the corporation and again to the shareholders) by electing to be treated as an S Corporation under the rules of Subchapter S of the Internal Revenue Code. In this way, the S Corporation passes its items of income, loss, deduction and credits through to its shareholders to be included on their separate returns.
Requirements for an S Corporation include:
- Domestic corporation with one class of stock.
- No more than 35 shareholders who are citizens or legal residents of the U.S.
- All your shareholders must consent to S Corporation status.
- Use of a permitted tax year.
- Filing of IRS Form 2553.
IRS Publication 589, "Tax Information on S Corporations," can give you more information. Note: S Corporations must be incorporated under the laws of Tennessee. Therefore, they are subject to state corporate excise (income) taxes and state corporate franchise (company value) taxes.
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Contact information for S Corporations |
Limited Liability Companies
This legal arrangement shares characteristics of both the individual and corporate identities. LLCs must consist of at least one member, and the ownership in your LLC is invested in memberships rather than shares of stock.
Limited liability companies offer some protection from liability for actions taken by your company or by other members of your company. It does not protect from liability for personal actions. In this way it resembles a sole proprietorship rather than a corporation.
Like an S Corporation, federal income taxes are paid only on income distributed to members as ordinary income. LLCs are not subject to state corporate taxes. A limited liability company can be expensive to organize and requires more administrative work. This form of organization is of use to professionals and general partnerships.
Requirements for an LLC include:
- A membership fee, due annually. Minimum fee of $300, maximum fee of $3,000.
- An annual report filed with the Secretary of State.
- Financial records prepared for any member requesting them.
- Board minutes recorded and maintained.
- Memberships sold only when all members agree to the transaction.
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Contact information for Limited Liability Companies |
Certificates of Authority
If your company is incorporated in states other than Tennessee, you are required to obtain a Certificate of Authority to conduct business operations within the state. The Certificate of Authority, TCA 48-11-309, may be relied upon as conclusive evidence that your foreign corporations (your businesses incorporated in states other than Tennessee) are in existence and/or are authorized to transact business in this state and are in good standing.
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Contact information for Certificates of Authority |
Business Trademarks
You may wish to protect your company name and/or service mark in the state of Tennessee by obtaining a state trademark. As a business owner, you can obtain a state trademark, which will protect your business name and/or service mark within Tennessee for 10 years.
You may also wish to protect your company name and/or symbol in the U.S. by obtaining a federal trademark. As a business owner, you can obtain a federal trademark, which will protect your business name and/or symbol within the United States for 10 years.
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Contact information for Trademarks |
S Corporation
Information and forms for incorporation can be obtained from:
Secretary of State
Corporation Division
Wm. R. Snodgrass TN Tower, 6th Floor
312 Eighth Avenue North
Nashville, Tennessee 37243-0405
Phone: 615-741-2286
Limited Liability
More information as well as forms for registration can be obtained from:
Secretary of State
Document Filing Office
Wm. R. Snodgrass TN Tower, 6th Floor
312 Eighth Avenue North
Nashville, Tennessee 37243-0405
Phone: 615-741-0537
Certificates of Authority
These forms can be obtained from:
Secretary of State
Document Filing Office
Wm. R. Snodgrass TN Tower, 6th Floor
312 Eighth Avenue North
Nashville, Tennessee 37243-0405
Phone: 615-741-0537
State Trademarks
To obtain permission and forms, contact:
Secretary of State
Trademark Office
Wm. R. Snodgrass TN Tower, 6th Floor
312 Eighth Avenue North
Nashville, Tennessee 37243-0405
Phone: 615-741-0531
Federal Trademarks
To obtain permission and forms, contact:
U.S. Patent and Trademark Office
Trademark Information Hotline
Phone: 703-308-9000