How to Incorporate in Tennessee

Published: June 26, 2023 • Incorporation, M&A

Introduction

When it comes to choosing a state to incorporate a company, Tennessee has emerged as a favorable destination for entrepreneurs and businesses alike. With its thriving business environment, numerous opportunities, and advantageous legal framework, Tennessee offers several compelling reasons to consider forming a company within its borders. In this blog post, we will provide an overview of Tennessee’s business landscape, compare it with other popular incorporation states, discuss the advantages of starting a company in Tennessee, and address considerations for nonresidents.

Tennessee boasts a robust and diverse business environment, making it an attractive choice for entrepreneurs. The state has a strong economy supported by various sectors, including manufacturing, healthcare, technology, music, and tourism. The cost of living and doing business in Tennessee is relatively lower compared to many other states, providing a competitive edge to businesses operating here. Additionally, the state offers excellent infrastructure, a skilled workforce, and a business-friendly regulatory environment.

Advantages of Starting a Company in Tennessee

  1. Low or No Taxes: The state offers tax benefits to businesses, such as no personal income tax, no sales tax on raw materials, manufacturing equipment, and pollution control equipment. Reduced sales tax on energy fuel used by manufacturers and a 1% tax credit on capital equipment are also provided. For S corporations, the income or loss of the corporation is passed on to the stockholders, so the corporation itself does not pay any income tax​1​.
  2. Business Growth Incentive Programs: Tennessee has various programs to assist businesses in achieving their short-term and long-term goals. Some of these include the FastTrack Infrastructure Program, Job Tax Credit, FastTrack Economic Development Fund, Enhanced Job Tax Credit, FastTrack Job Training Assistance Program, Industrial Machinery Tax Credit, and Sales Tax Exemption program​1​.
  3. Limited Liability Protection: As an owner of a Tennessee company, you will enjoy limited liability protection​​.
  4. Privacy: Tennessee requires corporations to list their registered agent on the public record, but officers and directors are not required to be listed
  5. Low Costs to incorporate in Tennessee are as follows:
  • The filing fee is $100​.
  • The filing fee for an annual report for a Tennessee Corporation is $20. For LLCs, the report cost is $300 for 1-6 members and an additional $50 for each member over six.

Considerations for Nonresidents

Nonresidents looking to start a company in Tennessee should consider the following:

  1. Registered Agent: Tennessee requires all LLCs and corporations to have a registered agent located within the state. The registered agent is responsible for receiving important legal and tax documents on behalf of the company.
  2. Compliance with State Laws: While residency is not required to form a company in Tennessee, businesses must still comply with the state’s laws and regulations, including tax requirements and annual reporting obligations.

Comparison with Other Popular Incorporation States

While states like California (CA), Delaware (DE), Texas (TX), Wyoming (WY), and Nevada (NV) are often considered popular choices for incorporation, Tennessee presents unique advantages. Unlike California, Tennessee offers a lower cost of living and fewer regulatory burdens. Compared to Delaware, which is known for its corporate-friendly laws, Tennessee’s corporate laws are also well-established and straightforward. Texas is known for its business-friendly environment, but Tennessee offers lower costs and a robust talent pool. Wyoming and Nevada, which are often chosen for their privacy and tax advantages, find competition in Tennessee due to its business-friendly policies and lower costs.

Choosing a Business Structure

Choosing the right business structure is critical for your business. The structure you choose will affect your legal liability, tax obligations, the cost and complexity of running your business, and even its success in the long run. Here’s a brief overview of the different types of business structures:

  1. Limited Liability Company (LLC):
    • Pros: LLCs offer limited liability to their owners (called members), which means members are not personally responsible for the company’s debts and liabilities. They also provide flexibility in management and profit distribution. Earnings and losses pass through to the members’ personal tax returns, avoiding the double taxation experienced by C corporations.
    • Cons: Some states charge an annual franchise tax or similar fee for LLCs. Transferring ownership can be more difficult compared to corporations. Some investors prefer to invest in corporations.
    • Considerations for Nonresidents: Non-US residents can be members of an LLC. However, they may be subject to US federal income tax on their share of the LLC income, and they must file a US tax return.
  2. C Corporation (C Corp):
    • Pros: C corporations offer limited liability protection to their owners (shareholders). They can have an unlimited number of shareholders and can be owned by other business entities. They can also retain earnings.
    • Cons: The main disadvantage is double taxation. C corporations pay corporate income tax on their earnings, and then shareholders also pay personal income tax on dividends. They also require more paperwork and formalities, such as holding annual meetings and keeping minutes.
    • Considerations for Nonresidents: Non-US residents can own or invest in a C corporation, making it a popular choice for foreign entrepreneurs and investors.
  3. S Corporation (S Corp):
    • Pros: Like C corporations, S corporations offer limited liability protection. However, they avoid double taxation by allowing income, losses, deductions, and credits to pass through to shareholders’ personal tax returns.
    • Cons: S corporations have strict eligibility requirements. They can have no more than 100 shareholders, all of whom must be US citizens or residents, and they can only have one class of stock. This makes them less flexible than other business types.
    • Considerations for Nonresidents: Non-US residents cannot be shareholders in an S corporation.
  4. Partnership:
    • Pros: Partnerships are relatively easy to form and offer flexibility in management. Profits and losses are passed through to the partners’ personal tax returns, avoiding double taxation.
    • Cons: Partners are personally liable for the partnership’s debts and liabilities. If one partner makes a mistake or incurs a debt, the other partners are responsible. Also, decision-making can be difficult if partners disagree.
    • Considerations for Nonresidents: Non-US residents can be partners in a partnership. However, like LLCs, they may be subject to US federal income tax on their share of the partnership income and must file a US tax return.

As a rule of thumb, if you’re a startup without definitive investors lined up, an LLC is generally a better choice because it’s simpler to set up and maintain, avoids double taxation, and requires fewer corporate formalities. A corporation might be a better choice if you plan to seek investment, need to retain earnings, or want the prestige associated with the corporate structure.

However, every business is unique, and there’s no one-size-fits-all answer. The best choice depends on your specific circumstances and needs. It’s always a good idea to consult with a business advisor or attorney to make an informed decision.

The Incorporation Process in TN

  1. Naming the Company: The first step is to choose a unique name for your business. The name must be distinguishable from other businesses registered in Tennessee. You can check for name availability using the Tennessee Secretary of State’s business name search tool. If your desired name is available, you can reserve it for a certain period. For LLCs, the name must include “Limited Liability Company” or an abbreviation such as “LLC” or “L.L.C.”. For corporations, the name must include “Corporation,” “Incorporated,” “Company,” or an abbreviation.
  2. Choosing a Registered Agent: A registered agent is a person or business entity that agrees to receive legal papers on behalf of your business. The registered agent must be a Tennessee resident or a business entity authorized to do business in Tennessee. The agent’s address must be a physical street address in Tennessee.
  3. Filing the Paperwork: To officially form your business, you need to file the Charter (for a corporation) or the Articles of Organization (for an LLC) with the Tennessee Secretary of State. The filing includes information such as the business name, registered agent, business purpose, and information about stocks (for corporations). The approval process generally takes about 3-5 business days, but expedited service is available for an additional fee.
  4. Creating an Operating Agreement or Bylaws: While not required by the state, it’s highly recommended to create an operating agreement (for an LLC) or bylaws (for a corporation). These documents set out the internal rules for your business, including how decisions will be made and how profits will be distributed. They can also help protect your limited liability status.

Resources for Entrepreneurs in TN

Tennessee offers a variety of resources to support new businesses:

Tennessee Business Help

Links to Official State Websites and Laws

General Resources for Starting a Business in the USA