Starting a business requires many decisions, one of the first being the choice of a business structure. This refers to how your business is legally organized and how it affects your liability for debts and profits, tax obligations, and more.
The sole proprietorship is a common choice in Tennessee, and throughout this guide, we’ll help you understand if it’s the right structure for your business. We’ll get into what a sole proprietorship is, its pros and cons, and how to get started in Tennessee.
Related: Tennessee Business Startup Checklist
What is a Sole Proprietorship?
A sole proprietorship is the simplest form of business under which one can operate a business. As the sole business owner, you are in charge of all business decisions and liable for all business debts and obligations. Here, your business isn’t legally separate from you. This means the money your business makes is your income, and any losses or debts are also yours. The simplicity of this structure is appealing, but it’s important to understand the full picture.
Other Business Structures:
- General partnership: Similar to a sole proprietorship, but two or more people share ownership, responsibilities, profits, and liabilities.
- Corporation: A separate legal entity from its owners, offering liability protection but with more complexity and administrative requirements.
- LLC (Limited Liability Company): A structure blending aspects of a partnership and a corporation, offering liability protection without as much complexity.
Sole Proprietorship Advantages
- Ease of setup: One of the greatest benefits of a Tennessee sole proprietorship is its ease of setup, as there is no business entity to register.
- Lowest startup costs: In Tennessee, starting as a sole proprietor means you avoid many of the fees that come with forming other types of business structures. This affordability makes it an appealing choice for many small business owners.
- Minimal paperwork: There’s not much in terms of paperwork to create a sole proprietorship.
Sole Proprietorship Disadvantages
- Unlimited personal liability: As the owner, you’re fully liable for all debts and obligations. If the business cannot meet its debts, your personal assets may be used to pay them off.
- Less business continuity: Sole proprietorships end with the owner’s death or incapacitation, which may impact contracts, relationships, and operations.
- Potential tax disadvantages: While taxation is simpler for sole proprietors, they pay income and self-employment taxes on profits, which can be a larger financial burden than other structures.
In summary, while a sole proprietorship in Tennessee offers simplicity and ease of management, it does come with risks, especially regarding personal liability. If this is a concern, consider forming a Limited Liability Company (LLC).
Related: How To Form A Tennessee LLC
Steps to Start a Sole Proprietorship in Tennessee
Starting a sole proprietorship in Tennessee involves specific steps to ensure your business is fully and legally operational. These steps range from choosing a business name to obtaining necessary licenses and permits.
Step 1: Choose a Business Name
In Tennessee, a sole proprietor can freely operate under the owner’s full name. However, if a more distinctive business name is desired, registration is necessary. For instance, suppose Jessica Taylor plans to start a photography studio. Instead of just operating as “Jessica Taylor,” she decides that “Snap in Style” is a more appealing name. In this instance, Jessica will need to register her Assumed Name (commonly referred to as a DBA or Doing Business As name), “Snap in Style.”
Step 2: Verify Name Availability
In Tennessee, an Assumed Name may not be registered if another business has registered a name that is the same or similar to another business. To find out if your business name is available, check out the Tennessee Secretary of State website to do a Tennessee business name search.
Step 3: Register for a Tennessee Assumed Name
To register an assumed name in Tennessee at the county level, visit your local county clerk’s office in the county where the business will operate. Obtain and complete a “Business Name Registration” or “Assumed Name Registration” form, providing your legal name, address, the chosen assumed name, and business details.
Related: How To Register A Tennessee Assumed Name
Something to note is that even though the business name is registered, it doesn’t prevent others from using it. You can apply for a trademark through the U.S. Patent & Trademark Office (USPTO) if you want sole rights to your business name.
Step 4: Research Business License Requirements
Securing the necessary business licenses and registrations is a standard requirement, regardless of your business structure. However, the requirements may vary depending on your business’s nature and location.
Business license: In Tennessee, most businesses require an annual business license from the County Clerk where the business is based within 20 days after starting. If the business is within city limits, a license may also be necessary from the Municipal Clerk. There are two types of business licenses in Tennessee, which include:
- Standard Business License: This license applies to businesses generating over $10,000 in revenue annually. The initial filing is with your county clerk, followed by an annual tax report to the Tennessee Department of Revenue.
- Minimal Activity Business License: This license is applicable for businesses grossing between $3,000 and $10,000 annually. The initial filing is with your county clerk, but no annual report on gross receipts is required.
You’ll need to submit this to the county where your business is located. Most counties will use the state Business Tax Registration Application, but some counties, like Davidson County, use a specific application.
Sales tax permit: Every business that sells goods or taxable services in Tennessee will register for a Tennessee Sales Tax Permit.
Professional license: Certain professions in Tennessee require a specific license. Common examples include appraisers, barbers, and food establishments. It’s essential to check if your profession falls under this category.
Employer Identification Number (EIN): If you plan to hire employees, you’ll need an EIN from the Internal Revenue Service (IRS). Even if not hiring, some banks may require an EIN to open a business bank account. Otherwise, your Social Security Number can be used for business tax purposes.
