S For - Tennessee

who has day-to-day responsibilities for running thebusiness, owns the firm. Sole proprietors own allthe assets of the business and the profits generatedby it. ey also assume complete responsibility forall of its liabilities. In the eyes of the law and thepublic, you are one in the same with the business.Sole proprietorships pay less in taxes thancorporations. Net income from the business isregular income filed on the owner’s personalincome tax return. Sole proprietors need abusiness license from the county and/ormunicipality in which the business operates.PartnershipsA General Partnership is the relationshipexisting between two or more persons whojoin to carry on a trade or business. Eachperson contributes money, property, labor orskill, and expects to share in the profits andlosses of the business. An example of a generalpartnership is a husband and wife ownedbusiness. is type of partnership is not a formof a corporation and carries the same personalliability as a sole proprietorship.Remember, businesses, home-based or otherwise,do not operate by producing goods or services. ey operate by selling those goods and services ata profit. ey make profits by controlling costs toproduce goods and services at a lower cost thanthey sell them. Does the business you are thinkingof starting require learning new skills? It may beharder to develop skills on your own than in acorporate setting that offers training as well ascolleagues to help the learning process. ere are avariety of resources online or in person.Setting Up Your BusinessChoosing the right legal structure for your businesswill require that you to contact an attorney, CPA ora business counselor. You need professional adviceon the pros and cons of each legal structure. Legalstructures include: Sole Proprietorships,Partnerships, C Corporation, S Corporation (alsocalled Subchapter S Corporation), Limited LiabilityCompany or Limited Liability Partnership.A General Partnership must file an annualinformation return to the IRS to report theincome, deductions, gains, losses, etc., from itsoperations, but it does not pay income tax. Instead,it "passes through" any profits or losses to itspartners. Each partner includes his or her share ofthe partnership's income or loss on his or her taxreturn.Legal structures include: Sole Proprietorships Partnerships C Corporations WWW.TNECD.GOV/BEROS Corporations(also called subchapter S Corporation)Sole Proprietorships e majority of small businesses start out as soleproprietorships. One person, usually the individualset t ing up your businessAs you enter this endeavor, recognize that the mostimportant ingredient is you. Know yourpersonality, interests, abilities, drive, commitment,relationships, priorities, and dreams. In addition,you should ask yourself a few questions. Do youhave the required experience in marketing, pricing,financial projections, and bookkeeping? Limited LiabilityCompany7

corpor ationsAll partnerships, should execute a partnershipagreement. e Partnership Agreement is a contractbetween the partners of the business that detailsexpectations, contributions, and the responsibilitiesof each partner. Discuss future expectations withyour partner(s). Do they want to grow a companyto operate, do they want to grow a company to sellshort-term, how will profits be distributed, and whatpercentages? Each partner should contribute valueto the business and each partner must recognize thevalue of the others’ contributions. Determine aheadof time who will contribute cash, labor, industryexperience and knowledge, sales leads, loans orguaranties. Responsibilities may differ fromcontributions, so be sure to define the partner’sindividual responsibilities as well as the groupresponsibilities. Include who can sign debtinstruments for the partnership, who determinescompensation, salaries, draws or profit sharing, whowill handle the record keeping, who overseesrecruitment to, or dissolution of, the partnership,and who can make amendments to the PartnershipAgreement. In any case, the Partnership Agreementshould be a written, notarized document. A lawyercan draw up the agreement and act as a facilitator tocover points not previously included. ere areexamples of Partnership Agreements online atwww.state.tn.us/sos, www.sba.gov andwww.score.org.CorporationsIncorporation gives the business a legalexistence separate from an individual person. at is, it can own assets and conductbusiness in its own name. A businessassumes a corporate identity whenregistered or “incorporated” with theTennessee Secretary of State. Acorporation can shield you and thestockholders from personal liability fromany lawful activities. Corporations payfederal taxes at a higher rate than soleproprietors. e corporation is liable forthe state’s franchise and excise tax. ereare two basic types of corporations, the Cand S Corporations.8C Corporations are standard corporations that areprimarily used by large groups of investors. A few ofthe requirements to be a corporation include havinga board of directors and corporate officers, havingstockholders as owners, holding regular boardmeetings, maintaining board minutes, approvingcorporate resolutions. e corporation allows theboard to authorize certain actions such as borrowingmoney, entering into contracts and allocatingcorporate resources beyond routine businesstransactions.If your business is an eligible domestic corporation,The basic requirements for anS Corporation include:The company must be aDomestic Corporation with oneclass of stockHave no more than 35citizens or legal residentshareholdersAll your shareholders mustconsent to S Corporation statusUse a permitted tax yearCompany must file IRSForm 2553WWW.TNECD.GOV/BERO

If the company is incorporated outside of Tennessee,you are required to obtain a Certificate of Authorityto conduct business operations within Tennessee. e Certificate of Authority, TCA 48-11-309, isevidence that out-of-state corporations are in goodstanding in their state and are authorized to conductbusiness in the State of Tennessee.Requirements for an LLCinclude:Membership fee is dueannuallyLLC fees range from 300 - 3,000An annual report filed with theSecretary of StateFinancial records prepared forany member requesting themBoard minutes recorded andmaintainedMemberships soldonly when all members agreeto the transactionLimited Liability CompanyLimited Liability Company (LLC) is a relatively newbusiness structure allowed by state statute. An LLCcan be expensive to organize and requires moreadministrative work than other legal forms ofbusiness. LLCs are popular because, similar to acorporation, owners have limited personal liabilityfor the debts and actions of the LLC. Other featuresWWW.TNECD.GOV/BEROof LLCs are more like a partnership, providingmanagement flexibility and the benefit of passthrough taxation. Owners of an LLC are calledmembers. Since most states do not restrictownership, members may include individuals,corporations, other LLCs and foreign entities(businesses outside of Tennessee). ere is nomaximum number of members. Most states alsopermit “single member” LLCs those having only oneowner. A few types of businesses generally cannotbe LLCs, such as banks and insurance companies. ere are special rules for foreign LLCs. e Tennessee Bar Association (TBA) will guide youto a legal referral service and help you discover if youwould qualify for free legal service. e TBA alsohas an online information section titled LawBytes.LawBytes is a free public service program that offerseasy-to-understand summaries on more than 70topics, ranging from employment law to wills andestates. More information about TBA andLawBytes can be found online at www.tba.org.LLC requirementsyou can avoid double federal taxation (paying taxesto the corporation and again to the shareholders) bycreating a S Corporation under the rules ofSubchapter S of the Internal Revenue Code. Underthe laws of Tennessee, an S Corporation isincorporated. erefore, they are subject to statefranchise and excise taxes. In this way, the SCorporation passes its items of income, loss,deduction, and credits through to its shareholders tobe included on their separate returns. e Tennessee Society of Certified PublicAccountants (TSCPA) is the state professionalorganization for certified public accountants.TSCPA can help businesses find a Certified PublicAccountant (CPA) to assist with the start-up andrunning of the business. TSCPA also has an onlineSmall Business Resource Center. e Small BusinessResource Center mission is to educate, provideinformation, and resources that would assist smallbusiness enterprises. is and more information canbe found online at www.tncpa.org.FEINIf you do not want to use your social securitynumber to identify your business, you are requiredto obtain a Federal Employer Identification Number(FEIN) from the IRS. e FEIN is your business’spermanent identification number and can be usedfor most of your business needs, including: openinga bank account; applying for business licenses; andfiling a tax return by mail.You can register for your FEIN online atwww.irs.gov or by calling 1-800-829-4933. Allcorporations and partnerships are required to havean FEIN.Advantages of Tennessee ere are many benefits to relocating your businessto Tennessee. Tennessee fosters a pro-businessclimate that gives access to vital economic9

relocat ioncomponents, such as a right-to-work environment, adependable and educated workforce, and a wealth oftechnology resources that provide opportunity forbusiness growth and profitability. In addition,Tennessee offers a reasonable cost of living and doesnot impose a personal state income tax or a stateproperty tax.Tennessee compares favorably with the cost of livingin other states. In fact, its eleven largest cities rankbelow the national average for cost of living andhousing costs are among the lowest in the nation.Tennessee enjoys a generally mild climate, providingfavorable conditions for the state's many advantagesas well as working and living with a minimum ofweather-related disruptions. Tennessee borders eightstates and is within a day’s drive of 75% of the U.S.population.Tennessee has a strong entrepreneurial climate.Recently, Tennessee ranked as having the fourthhighest entrepreneurial activity rate in the nation, ina national study . e State of Tennessee supportssmall businesses and entrepreneurs with a lowbusiness tax burden, lower cost of living, an onlinebusiness registration systems, access tonontraditional financing, state sponsored healthinsurance program for small businesses and adiverse, robust economy proximity to 75% of theU.S. population.Foreign-Owned(Out-of-State) Corporations e State of Tennessee recognizes businessesincorporated outside of Tennessee as foreign-owned(or out-of-state) corporations. When you relocateyour business to Tennessee, you will need to decideif you will operate your business as a foreign-ownedbusiness or establish your business as a Tennesseecorporation. Foreign-owned businesses pay a onetime 600 fee and a 20 annual fee to the TennesseeSecretary of State. You will need to fill outapplication form ss-4429 for corporations andapplication form ss-4236 for an LLC. ese formscan be found online at www.tn.gov/sos. A letter ofgood standing from your original state needs toaccompany your application. Typically, remaining aforeign owned business is beneficial only if you planto continue operations in your original state. Atrusted CPA can advise you on the specific taxliabilities for your business.If you plan to cease operations in the state you aremoving from, you should register your business withthe Tennessee Secretary of State as a Tennesseecorporation. You can register your corporationonline through the One Stop Business Resourceportal found at: www.tennesseeanytime.org/osbr. Inaddition to registering your corporation with theTennessee Secretary of State, you can register withthe Tennessee Departments of Revenue and LaborRelocating Your Business to Tennesseeand WorkforceDevelopment.You will most likely needto obtain local businesslicenses through thecounty clerk office wherethe business will belocated in Tennessee. Ifyou are in a regulatedindustry, such as generalcontracting, that requiresspecific licenses, checkwith the regulatoryagency who licenses youto see if they have areciprocal agreementwith the State ofTennessee to transferyour license.Relocating YourFamily e State of Tennessee10WWW.TNECD.GOV/BERO

Taxes and InsuranceWhen you start or expand abusiness in Tennessee, it isimportant to understand thepotential tax liability. is sectionwill provide you with a basicunderstanding of standard taxesthat may affect you while doingbusiness in Tennessee. einformation provided in thissection will assist you inestimating tax payments toinclude in cash flow projections ofthe business plan. You shouldalso consider local property taxesand special excise taxes that maybe applicable. e main areas oftax for small businesses are local,state, federal, franchise and excisetaxes, and sales and use taxes.Local, State, andFederal Taxes e Tennessee General Assemblyauthorizes counties andWWW.TNECD.GOV/BEROmunicipalities to levy a privilegetax, that is, a tax for the privilegeof operating a business in theirjurisdictions. All counties withthe exception of Clay, Claiborne,and Morgan levy the tax as abusiness license tax.Incorporated cities can alsoimpose the privilege tax. is taxis based on a percentage of sales orgross receipts in succeeding years.If the business has a physicallocation in several different citiesor counties, the business is liableto each city or county based onsales or receipts accumulated ineach location. All businessesgenerally are subject to this tax.Exempt businesses includemanufacturers, businesses withless than 3,000 in annual sales,and professionals such as doctorsand lawyers. e U.S. Treasurycollects federal taxes through theInternal Revenue Service (IRS). e legal structure of yourbusiness determines what federaltaxes are due and payable. ereare four general kinds of federalbusiness tax: federal income tax,self-employment tax, employmenttax, and excise tax. Every businessmust file an annual income taxreturn to the federal government.Publication 583 released inJanuary 2007 is a good startingpoint for information aboutfederal taxes. is and manymore relevant IRS publicationscan be found online atwww.irs.gov. e Tennessee Department ofRevenue is the state’s chief taxcollector and is responsible forcollecting approximately 92percent of total state tax revenue. e most common business taxesthey collect are franchise andexcise taxes and sales and use tax. e Department publishes a startup guide specific to tax liabilities.You can access the guide online at:www.tn.gov/revenue.Franchise and ExciseTaxFranchise and excise tax,Tennessee’s corporate tax, is basedupon the higher of two bases oneither net worth or book value ofreal and tangible property ownedor used in the state, plus rentalvalues. Most businesses (exceptgeneral partnerships, soleproprietorships and thosebusinesses exempt in T.C.A. 67-42008) organized for profit anddoing business in Tennessee aresubject to the state's franchise tax.Out-of-state companies doingbusiness in Tennessee are liableeven if they are not based inTennessee, but they mayt axes a nd insuranceprovides a Newcomer’s Guideonline atwww.tennesseeanytime.org/local/relocate.html. e guide provideshelpful links and information onbecoming a legal resident inTennessee and familiarizingyourself with Tennessee’scommunities, neighborhoods andeducation systems.11

franchise and exc ise taxapportion their tax base. If youhave a question concerningwhether or not your business isexempt from this tax, pleasecontact the TennesseeDepartment of Revenue atwww.tennessee.gov/revenue.Franchise Tax:Tax on the greater of net worth or book value ofproperty owned or used in TennesseeTax rate is 25 cent per 100Pollution Control Equipment is exempt e excise tax is based upon thenet earnings of taxable entitiesconducted within Tennessee.Most businesses (except generalpartnerships, sole proprietorshipsand those businesses exempt inT.C.A. 67-4-2008) organized forprofit and doing business inTennessee are subject to thestate's excise tax. Out-of-statecompanies doing business inTennessee are liable even if theyare not based in Tennessee, butthey may apportion their taxbase. If you have a questionconcerning whether or not yourbusiness is exempt from this tax,please contact the TennesseeDepartment of Revenue.Excise Tax:Sales and Use TaxNet operating losses can be carried forward for15 years Sales and Use Tax e sales and use tax is aconsumer-oriented tax imposedon the manufacture, distribution,or retail sale of tangible personalproperty within the state. It alsois imposed on many forms ofservices. Any business that sells,leases, or rents tangible personalproperty or services (unless thebusiness is specifically exempt) isliable.Property under construction and not being utilizedwill not be included in the tax baseProperty rented from the industrial developmentcorporation may be valued by capitalizing it on thebooksTax is based on the net earning of the companyderived from doing business in TennesseeTax rate is 6.5%Sales outside of Tennessee are not taxedAll capital losses are claimed in the year incurred7% state sales tax plus the applicable local rate(2.25% - 2.75%) on any person or company whomanufactures, distributes of sells tangible personalproperty within the stateNo Sales Tax is levied on: Purchases, installation,and repairs of qualified industrial machineryRaw materials for processingPollution control equipment for manufacturersAssistance with Taxes e IRS and TennesseeDepartment of Revenue provideassistance to new and existingbusinesses to understand andcomply with their tax burdens. e IRS sponsors educationalworkshops that are deliveredthrough Small BusinessDevelopment Centersthroughout the state. You canfind contact information for theCenters in the Appendix of thisguide. e IRS also publishes12Reduced sales tax rates for manufactures’ use ofenergy fuel and water (1.5% vs. 7%)Qualified industrial suppliesItems purchased for resaleContainers, packaging, and wrapping materialsAdditional exemptions of credits may be availableWWW.TNECD.GOV/BERO

Tennessee Jobs Tax Credit forEmploying Persons with DisabilitiesOnline orWeb-based Businesses e State of Tennessee recognizes online orweb-based businesses as Tennessee businesses.Tennessee web-based businesses are liable forthe same taxes and regulations as businesseswith a storefront. Tennessee web-basedbusinesses that sell products or taxable servicesare required to collect sales tax from theirTennessee consumers. If they sell toconsumers outside of Tennessee, they are notrequired to collect sales tax, because thoseconsumers are required to pay a use tax to theirdomestic departments of Revenue. Moreinformation on this topic can be found onlineat www.tn.gov/revenue.free cd’s and online video instructions for smallbusiness at www.irs.gov/smallbusiness. e TennesseeDepartment of Revenue publishes a tax guide fornew businesses. You can also send questions viae-mail to TN.Revenue@state.tn.us.Registering Your BusinessYou can register your business with the TennesseeDepartment of Revenue online at:www.tennesseeanytime.org/bizreg.Tax-Based IncentivesTennessee allows businesses a franchise and excisetax credit based on a minimum level of capitalinvestment and number of jobs created, called thejob tax credit. e amount of tax credit and theperiod of time the credit may be used aredetermined by the size of the business investment.Typically, the minimum requirements are 500,000in capital investment and creation of 25 qualifiedfull-time jobs with health insurance. In addition toWWW.TNECD.GOV/BEROEmployers may be eligible for a tax credit if theyhire employees with disabilities who have receivedvocational rehabilitation services through the stateDivision of Rehabilitation Services. Entities doingbusiness in the State of Tennessee that create newjobs, either full time or part time, that are filled byindividuals with disabilities may be entitled to aone-time job tax credit.onine businessesthe job tax credit, other tax credits apply to:industrial machinery, emerging industry, daycarefacility, and pollution control equipment. eTennessee General Assembly authorizes all taxcredits and incentives mentioned above. Detailedinformation on all of the tax credits listed above canbe found online at tnecd.gov/bizdev incentives.htm.T.C.A. § 67-4-2109(g) provides for a job tax creditof 5,000 for each net new full-time employee joband a credit of 2,000 for each net new part-timeemployee job for employment of persons withdisabilities who are

e beneXts of starting your own business include Yexible hours, being your own boss, getting away from a corporate setting, and having no limit to your income. e time required in a start-up business, energy needed to run a new business, stress put on family, and Xnancial stress could be a few of the concerns for starting a business. e