Tennessee is home to over 664,000 small businesses that account for 99.5% of the businesses in the state, employing 41.9% of Tennessee's workforce. The top industries in the state in 2023 included construction and services (professional, scientific, technical, etc.)
Known for its low taxes and pro-business environment, Tennessee offers a strong economy driven by industries such as healthcare, manufacturing, and music. The state’s skilled workforce and strategic location make it an appealing destination for businesses. It also offers diversity in ownership, with over 17% of businesses owned by BIPoC folks and about 43% of businesses owned by women.
Here's a primer on how to start a business in Tennessee.
Costs associated with forming a business varies by business entity type and by state the business was formed in. We aim to cover here the basic costs specific to the state for starting a business. We also touch upon other costs in order to stay compliant and continue to doing business in the state, such as paying various state taxes or complying with local minimum wage laws when hiring in-state.
We cover in broad strokes the following costs:
There are several types of business structures you can choose from when forming your business. Which is best for your business depends on a variety of factors, like ownership in the business, taxation, and more.
No State Filing: There are two types of structures which can be automatically formed without any filing with the state. Sole proprietorship and general partnership falls into this category, and they are a popular form of self-employment.
Formed or Incorporated: Three most common business entities that require some formation or incorporation with the state are corporation, limited liability partnership (LLP), and limited liability company (LLC). Each structure has its own one-time formation or set-up cost.
Tennessee offers the basic entity types that businesses can choose from in any state when filing for a domestic entity setup: Corporation, LLP, and LLC. There are additional variations for each of these entity types as well as other structures, specified upon formation (discussed in further detail below).
Professionals may form a professional corporation or professional LLC. Corporate names must contain the words “professional corporation,” “professional association,” or “service corporation,” or the abbreviation “P.C.,” “P.A.,” or “S.C.” A professional limited liability company name must contain the words “professional limited company,” “professional limited liability company,” “professional LLC,” or “limited liability professional company,” or the abbreviation “P.L.C.,” “P.L.L.C.,” “L.L.P.C.,” “PLC,” “PLLC,” or “LLPC.”
Domestic and foreign entities can be formed predominantly online at the Business Services Portal, operated by Tennessee’s Secretary of State. Follow their New Business Checklist after registering your entity for next steps. The state also offers a Start Smart Business Resource to assist in the formation of new companies. LPs (domestic & foreign), LLPs (domestic & foreign), and General Partnerships will need to mail in their formation documentation to the SoS.
Across all US states, the average cost of formation is roughly $100 with some states costing as little as ~$50 to create a corporation and some as high as $500+ to form an LLC.
Here are the formation costs (up to date at the time of this writing) for three most common entity types for businesses filed with the state:
Franchise taxes are state fees that businesses pay in order to have the right to operate in those states. They are paid in addition to state and federal income taxes. Failure to file can cause a business to lose its good standing with the state, making it difficult to operate, get loans, and may cost the business clients if clients require this information.
Here are the franchise tax fees for each business entity structure in this state as of the time of this writing.
Taxes, taxes, and more taxes. Although income taxes may seem far off concern when starting a business, the truth is that not withholding enough for income taxes is a material cost to business owners. Here we briefly cover state income taxes. For a better overview of self-employment taxes, you can read more on Small Business Tax Planning.
Pass-Through Entities: Pass-through entities are boon to small business owners. A pass-through entity is a business structure where income passes directly to the owners or investors, and they report it on their personal tax returns. This allows the business to avoid paying corporate taxes, making it a more tax-efficient option for small businesses. This also makes filing taxes significantly simpler as only one return is needed.
By default, sole proprietorships, LLCs, and partnerships are considered pass-through entities. In the case of LLCs, LLCs are usually referred to as disregarded entities. However, owners can choose to get their LLC be recognized and treated differently for tax purposes with the IRS.
Corporate Income Tax: Most states (44 out of 50) levy a corporate income tax.
C-Corps pay a C-Corp state income tax rate. If the income tax is pass-through, as with S-Corps, use your personal income tax rate.
Limited Liability Companies: For LLCs, the tax rate depends on the how you set up the LLC business structure.
Business owners who sell goods or services within a state are typically required to collect and remit state sales tax. Each state has different rules regarding what is taxable, so it’s crucial to understand the state’s specific requirements. Most businesses aren't at significant risk of non-compliance with sales tax until they reach the state's economic nexus threshold.
Economic nexus refers to the threshold of sales or transactions in a state that, once exceeded, obligates a business to collect sales tax, even if they don't have a physical presence there. Once a business achieves economic nexus, they must register with the state’s tax authority and start collecting sales tax on applicable sales. Failing to comply with these requirements can result in penalties and back taxes. Economic nexus is particular important when it comes to online sales for e-commerce companies.
The general state sales tax rate is 7% in Tennessee, with 4% tax on food, and other percentages on special products/services.
Local jurisdictions may have additional sales taxes, which can be no higher than 2.75% (for a total general maximum of 9.25%),
If you're considering hiring employees for in-person work, then knowing your state's employment laws are important.
One important to factor is knowing the local minimum wage, which varies depending on state and sometimes even by city or county. Note that in addition to the hourly rate, employers should also consider payroll taxes, workers’ compensation insurance, and potential benefits costs.
Here we just provide a review in the table below costs specific to the state, namely the state's specific minimum wage, any applicable exceptions to the minimum wage, and recurring payroll taxes.
*LLP Filing Fee Note: $50 per member, $250 minimum, $2,500 maximum
**General Business License Note: No business license is needed if the organization makes under $3,000 in gross sales. It is then referred to as a minimum activity license if making between $3,000 and $100,000 in gross sales, and finally, is referred to as a standard business license if making more than $100,000 in gross sales. Costs will vary by county, with a list of all Tennessee County Clerks available here.
Annual Reports are due on or before the first day of the fourth month following the company's fiscal year closing. They can be submitted here, with the state offering detailed how-to videos here.
Certificates of Existence (aka Good Standing) can be requested online (for $20), with a mail option as well. Other certificates and documents can be requested here.
Business Name Availability can be searched for here, with a general Business Information Search capability available by the state here.
For a fee of $20, business names can be reserved for 120 days.
Other relevant forms and fees are detailed here.
The idea of starting a business can be exciting, but the plethora of choices, jargon, and costs associated with the pure act of setting up a business with the state can be an unnecessarily daunting and time-consuming process.
Although this guide can't setup your business entity for you, it provides an overview so you can get a head start. We hope this article has sheds light on the essential costs involved and provides guidance on how to manage them effectively, setting you on a path towards entrepreneurial success.
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