When forming a business entity, determine which entity type provides you with the most advantageous structure for federal, state and local taxes. For an existing business it may be advantageous for tax purposes to change the business entity’s classification. Unlike most states, Tennessee imposes taxation on certain business entities including limited liability companies and S corporations. This typically includes one-member LLCs treated as “disregarded entities” for federal income tax purposes. Certain entity types may also be specifically excluded from, or qualify for, exemptions from certain taxes depending on the entity’s ownership structure, business activities or asset holdings. In choosing an entity structure for your business, your legal and tax advisors should advise you on the various tax advantages and disadvantages associated with each entity type.
Below is a basic summary of some of the more common business taxes and registration requirements to which Tennessee entities may be subject.
Federal Income Taxes
For federal income tax purposes, single-member LLCs and other single-member pass-through entities are treated as sole proprietorships unless you “check-the-box” and choose to be taxed as a corporation. This means that single-member LLCs do not pay federal income taxes and do not have to file an annual return with the IRS if they have a single owner. However, single-member limited liability companies must report all profits and losses on the single member’s federal tax return. An individual who is the sole owner of a LLC must report his or her earnings from the LLC on Schedule C of their 1040 tax return.
Like their single-member counterparts, multi-member pass-through entities such as LLCs, LPs and S corporations are not subject to federal income taxes unless they choose to be. However, multi-member pass-through entities usually must file an annual Form 1065 tax return with the IRS which shows distributions to members on its Schedule K-1. The members (if individual persons) must report all profits and losses from their K-1 statements on Schedule C of their 1040 tax return.
Corporations which, for tax purposes, do not qualify as pass-through entities are subject to double taxation. This means they are subject to federal income taxes and their shareholders are subject to additional income taxes on any dividends distributed by the corporation to the individual.
Franchise & Excise Tax
Tennessee imposes franchise and excise taxes on any entity that provides limited-liability protection unless they qualify for an exemption. The excise tax is equal to 6.5% of the net income earned by the entity, and the franchise tax is an amount equal to the value of the entity’s property ($2,500 per one million dollars of value). Tennessee law requires a business subject to franchise and excise taxes to register with the Tennessee Department of Revenue within 15 days after becoming subject to the tax. Each year entities subject to franchise and excise tax must file a tax return form FAE 170 with the Tennessee Department of Revenue.
Tangible Personal Property Tax
Tennessee law further requires individuals and entities operating for profit as a business or profession to complete a tangible, personal-property schedule by March 1st of each year unless the business qualifies for an exemption. The data reported on this schedule typically includes all personal property used by a business or profession as of January 1st. The tax rate varies by county. At the time of this writing, in Davidson County, the effective rate for non-industrial personal property equals approximately 1.1% of the value of your personal property. For every $100,000 of personal property owned or leased by a Davidson County business, they can expect to pay approximately $1,100 in annual personal property taxes.
Most counties and larger cities in Tennessee have passed local business tax ordinances that require businesses to be licensed and have their taxes paid. Business tax is assessed for the privilege of conducting business within any county and/or city. If your business is in a county and a city that both have a business tax, two separate tax returns must be filed. Each county and city has different registration requirements. Once registered, your information is shared with the Tennessee Department of Revenue which is responsible for mailing out tax returns to your business when appropriate.
Professional Privilege Tax
In Tennessee certain “professional” occupations which require a Tennessee license or registration are subject to a professional privilege tax. Those persons subject to the professional privilege tax must annually electronically file tax form PRO 404 and pay $400 by June 1st.
Registration with the Tennessee Secretary of State
To form a legal entity in Tennessee that affords limited-liability protection, depending on the limited-liability entity type you desire to form, you must first file either a charter (at a cost of $100) or articles of organization (at a cost of the greater of $300 or $50 per number of members up to $3,000) with the Tennessee secretary of state. Once filed with the Tennessee secretary of state, the charter or articles of organization must be filed with the register of deeds in the county in which the entity has its principal office (at a cost of approximately $20). An already existing, out-of-state entity desiring to do business in Tennessee must apply for a certificate of authority or notice of registration (at a cost of $600 for a corporation; the greater of $300 or $50 per number of members up to $3,000 for LLC and LPs) to transact business in Tennessee.
By April 1st of each successive year, limited-liability entities registered with Tennessee must file an annual report. This filing fee is $20 for corporations or the greater of $300 or $50 per number of members up to $3,000 for LLCs.