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 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: How to start a business in Tennessee

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: Except for a DBA (Doing Business As) registration, if you’re using a trade name, and the necessary licenses and permits, there’s not much else in terms of paperwork.

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 a set of 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

A sole proprietor can freely operate under the owner’s full name in Tennessee. 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 “Snap in Style” is a more appealing name. In this instance, Jessica will need to register her DBA (Doing Business As) name, “Snap in Style.”

Step 2: Register the Business Name

Somewhat confusingly, in Tennessee, sole proprietors register their DBA by completing a Business Tax Application (See step 3). Depending on the county, there might be a specific application, like for Davidson County. But don’t worry, the state provides a general Business Tax Registration Application that works for all places. You’ll need to submit this to the county where your business is located.

Related: How to register a Tennessee DBA

Somthing to note is that even though the business name is registered, it doesn’t prevent others from using this name. If you want sole rights to your business name, you can apply for a trademark through the U.S. Patent & Trademark Office (USPTO).

Step 3: Research Business License Requirements

Securing the necessary business licenses and registrations is a standard requirement, regardless of your business structure. The requirements may vary depending on the nature of your business and its location.

Business license: In Tennessee, most businesses require an annual business license from the County Clerk in the county where the business is based. 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 grossing over $10,000 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: For businesses grossing between $3,000 and $10,000 annually, this license is applicable. The initial filing is with your county clerk, but no annual report on gross receipts is required.

Sales tax permit: Every business that sells goods or taxable services in Tennessee will need to register for a 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.

Related: What business licenses are needed in Tennessee?

Wrapping Up

We hope this guide has been helpful for you! We know this is an exciting time as you make decisions about your business. What entity are you considering for your business, and why have you chosen this direction? If there’s anything more you’d like to know, don’t hesitate to drop your question in the comments.