The Limited Liability Company (LLC) is a popular entity structure for businesses starting in the state of Tennessee. The LLC provides personal liability protection and has the potential to save money on taxes. With our step-by-step guide, you can learn how to form an LLC in Tennessee without an attorney.
Unlike a sole proprietorship or partnership where the small business owner can be personally liable for lawsuits against the business, the LLC is a separate legal structure, protecting the business owner’s personal assets.
Besides the liability protection, the Limited Liability Company provides several other benefits over the sole proprietorship, partnership, and corporation because of the multiple tax options, ease of administration, and management flexibility.
Steps to Form a Tennessee LLC
Let’s break down the steps to complete the Tennessee LLC formation process.
Total Time: 10 minutes
Step 1: Choose a Name for the LLC
The first step in forming a Tennessee Limited Liability Company is to make sure the name you want is available.
It’s critical to do a name search before registering an LLC name, as the name of each LLC must be distinguishable from other entity names registered in the state of Tennessee. The Tennessee Secretary of State makes it easy to search and verify if your LLC name is available. Here is more information on how to do a Tennessee LLC name search.
In addition to the name being unique, the entity designator (identifier used at the end of the business name) must be either:
– Limited Liability Company
A comma may be used after the business name and before the designator. “Cowboy Cleaners LLC” and “Cowboy Cleaners, LLC” are both acceptable.
If there is a name you want to use but aren’t ready to form the LLC, the Application for Reservation of Name (Form ss-4228) can be filed to hold the name for up to 4 months. The state filing fee for a name reservation is $20, paid to the Secretary of State.
Before settling on an LLC name, you may want to do a domain name (also called a URL) search to match your business name.
Step 2: Appoint a Tennessee Registered Agent
Every LLC in Tennessee is required to have a Registered Agent. A Registered Agent will act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the LLC.
The basic requirements to be a Registered Agent in Tennessee include:
– The agent must be a Tennessee resident at least 18 years of age or a commercial Registered Agent service with a registered office in the state.
– The agent must have a physical address in the state (PO Boxes aren’t allowed).
– The agent must generally be available during normal business hours at the address provided to receive service of process.
Learn more about the requirements for a Registered Agent in Tennessee.
If you are going to use a commercial Registered Agent service, be sure to have their SOS Control Number before filing the Articles of Organization (Step 3).
Any individual meeting the requirements can be the agent; however, the agent’s name and address become public record, and with that comes a loss of privacy. This is more important for some entrepreneurs, especially working from home or still employed. Hiring a company like Northwest Registered Agent to be the Registered Agent will reduce unwanted phone calls and mailings.
Step 3: File the Tennessee Articles of Organization
The paperwork to officially create an LLC in Tennessee is called the Articles of Organization. To submit the paperwork, either file online through the Tennessee Secretary of State’s website or fill out and mail the Articles of Organization (Form SS-4270).
Articles of Organization, a few sections and terms can be confusing. Let’s go over a few of these sections to help get your LLC started right.
Formation Locale –
– Domestic Tennessee Business – A “Domestic LLC” is one that originates and is based in Tennessee. Most filers select Domestic LLC.
– Foreign Business – If the LLC was originally formed in another state and wants to do business in Tennessee, select “Foreign Business.”
Business Type – This is an optional section for the Series LLC designation. A Series LLC provides liability protection across multiple asset groups or businesses, each of which would be protected from liabilities from the other series. The Series LLC is not a common choice and is more commonly used with real estate investment companies.
Period of Duration – In this section, you can indicate how long the LLC intends to remain in existence. Most LLCs will choose a Perpetual duration; however, some businesses (usually investment-related) will have a specific closure date.
Fiscal Year Close – Select the last month of the fiscal year for the LLC. Most LLCs will choose December. Single-Member LLCs and LLCs taxed as a partnership will automatically choose December.
Delayed Effective Date – Leave this field blank if you want the LLC to start immediately. If you want the LLC to start on a later date, enter a date less than 90 days in the future. The main reason for delaying the LLC start date is when the filing is made close to the end of a calendar year, and the business isn’t going to have any activity until the start of the year. You can eliminate the need to file a partial-year business tax return by delaying the start date until the following year.
Management Structure – This section asks if the LLC is Director-Managed, Member-Managed, or Manager-Managed.
– Director-Managed LLCs have a board of directors that have the power to make decisions for the business.
– Member-Managed LLCs have an active involvement in the management and have the authority to act on behalf of the LLC.
– Manager-Managed LLCs are hired by the members to run the LLC, similar to a CEO of a corporation. This is generally used when there are passive members in the LLC, and the members do not actively manage or operate in the affairs of the business.
Most LLCs are member-managed.
Obligated Member Entity – This is an optional section. An OME is exempt from Tennessee franchise and excise tax but is offered no liability protection, which is one of the major benefits of having an LLC. If you are considering this selection, be sure to consider the legal aspects.
Principal Office Address -In this section, enter the street address, city, state, and zip code of the initial principal office. This address can be the LLC’s physical address, or it can be the address where the business records are stored. You may not use a PO Box for the designated office.
Mailing Address – If correspondence from the Secretary of State should go to a different address from the Principal Office, enter that information in this section.
Estimated Cost: 300 USD
Turnaround Time: Online filings are processed immediately, while mailed-in forms typically take 5-7 days for the state to process the LLC paperwork.
You don't have to form your LLC by yourself or pay an attorney!Forming an LLC is a little intimidating, especially when it’s your first time. Professional entity formation services help guide you to make sure it’s done right. Check out our reviews of popular LLC formation services to learn more.
You have a Tennessee LLC! Now what??
Once the LLC has been formed, there are a few additional steps to take care of. Below is a list of the most common tasks.
Prepare a Tennessee LLC Operating Agreement
The operating agreement is a document that governs the framework of an LLC. This document covers items like ownership rights, member responsibilities, how profits and losses are distributed, and more.
Limited Liability Companies are not required to have an operating agreement in Tennessee, but it is still worth considering. Without an operating agreement:
- The LLC could be subject to generic state rules that may be detrimental in the event of a lawsuit.
- Member’s personal liability protection may be diminished.
- Members may not fully understand their roles and responsibilities, which could lead to costly disputes in the future.
Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Federal Tax Identification Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes. The EIN will be needed to hire employees, open a bank account, build business credit, register for business licenses and permits, file federal and state taxes, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Related: How to Apply for an EIN
Elect the LLC’s Form of Federal Income Taxation
One of the significant benefits of the Limited Liability Company is the tax flexibility it provides. When applying for the Employer Identification Number, you will choose how the entity will be taxed for federal income tax purposes. While there are some limitations, an LLC may be classified for federal income tax purposes as a:
- Sole proprietorship
While this may sound confusing, this refers to how the LLC is taxed, not the legal structure.
Related: How can an LLC be taxed?
By default, the taxation of an LLC is called pass-through taxation, which means the profits or losses of the LLC flow through to the members.
Single-member LLCs will, by default, be taxed as a sole proprietorship. The members can also elect to change the taxation to a C-corporation or an S-corporation.
Multi-member LLCs will, by default, be taxed as a partnership. The members can also elect to change the taxation to a C-corporation or an S-corporation.
In general, the difference between being taxed as a corporation and being taxed as a sole proprietorship or partnership is that the profits and losses are passed to the member’s federal income tax returns based on their percentage of ownership. As a result, the owner will pay self-employment taxes on all business profits. As an alternative, electing to be taxed as a corporation the members will need to take a reasonable salary and then pay payroll taxes. Any remaining profits are distributed and aren’t subject to payroll taxes, resulting in potential tax savings.
Before electing how your LLC will be taxed, consider talking with an accountant to assess which one will be best for you. Some tax elections, such as the C corporation, may be detrimental for some people due to double taxation.
Open an LLC Bank Account
Opening a bank account for your LLC is important for liability protection as the account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original LLC formation paperwork from the state showing the creation of the LLC.
- Driver’s licenses of the members.
- Occasionally, the bank will request a Tennessee Certificate of Good Standing to prove the LLC is active and in good standing with the state.
Apply for Business Licenses and Permits
In addition to forming the LLC, there will likely be various business licenses and permits needed before starting the business. Some common registrations include:
- Business License – Most businesses in Tennessee (even home-based businesses occasionally) need to purchase an annual business license with the County Clerk in the county where the business is located. A license may also need to be possibly purchased through the Municipal Clerk if the business is located within city limits.
- Professional License – Certain services such as barbershops, accountants, salons, and others must be licensed. Licensed professionals going into business and offering a professional service have the option of forming a Professional Limited Liability Company (sometimes referred to as a PLLC or Professional LLC), which allows them more options in naming their LLC. The steps for forming a PLLC is similar to the LLC.
- Sales Tax Permit – In order to sell products and certain services, registration for a sales tax permit with the Tennessee Department of Revenue will be necessary.
Get Business Insurance
Even with the liability protection of the LLC, business insurance is important to protect the business. The most common types of insurance include:
General Liability Insurance – covers damages owed and medical expenses for accidents that happen at your place of business.
Business Property Insurance – replaces damaged, stolen, or lost business property. This includes your physical business location, equipment, supplies, and anything else you used to run your business.
Business Vehicle Insurance – covers company vehicles and may also include coverage for personal vehicles used for business-related activities. Many personal policies won’t cover your vehicle if there is an accident while being used for business purposes.
Workers Compensation Insurance – mandatory in most states if you have employees, this insurance covers medical expenses that occur because of an accident or injury that happens to one of your employees while they’re at work.
File the Annual Report
A Tennessee Limited Liability Company is required to file an annual report with the Tennessee Secretary of State. The annual report updates ownership information and other details.
The annual report is due by the first day of the fourth month of the LLC’s fiscal year. Most LLCs will use a calendar fiscal year which means the report is due April 1st.
Pay the Franchise Tax
All LLCs will be assessed an annual franchise tax. The franchise tax isn’t a tax on franchised businesses like McDonald’s, however, it is a tax on the privilege of doing business in the state. The tax is based on the entity’s net worth or the value of real and tangible property in the state (whichever is greater), with a minimum tax of $100.
Common Questions To Starting An LLC In Tennessee
How much does it cost to start an LLC in Tennessee?
The state filing fee to start an LLC in Tennessee is a minimum of $300 for 1-6 members. Each additional member will increase the filing fee by $50.
Is there a yearly fee for an LLC in Tennessee?
Each year, an annual report and $300 annual filing fee must be paid to the Tennessee Secretary of State.
How long does it take to start an LLC in Tennessee?
LLCs formed online are processed immediately, while mailed in forms can take 5-7 business days.
Do I have to pay to hire a registered agent?
No. Anyone can act as a registered agent, provided they are at least 18 years old, reside in the state, and are generally available to receive documents during normal business hours.
If I have an LLC, is a business license required?
It’s sometimes thought that the LLC and business license are the same, but they aren’t. An LLC is referred to as the business entity, which is how the business is organized to conduct business. A business license is an approval from a government entity to legally operate.
What is a Foreign Limited Liability Company?
A foreign LLC refers to an LLC that is physically operating in states outside of the state where it was formed. Physically operating means having a presence, such as having an office or employee in the state. The LLC will need to register as a foreign LLC in each state that the LLC plans to operate.
What is a Professional Limited Liability Company?
Businesses that require occupational licensing in Tennessee, such as accountants, architects, veterinarians, etc., will have the option of filing file for a Professional Limited Liability Company (PLLC) instead of an LLC. Filing for a PLLC is very similar to that of the LLC.