If you're planning on starting a business in Tennessee, it's important to understand the tax classification of LLCs in Tennessee. You'll have to pay state and federal taxes on the business, and your income is taxable to the members of the LLC. There are three different types of LLCs in Tennessee, the S Corporation, the C-Corporation, and the sole-proprietorship.
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Pass-through entity
A Tennessee LLC tax classification is very similar to that of a corporation. The primary difference between the two is that an LLC pays tax at the individual level instead of at the company level. In contrast, a corporation pays tax on all of its income before it distributes it as dividends. In addition, corporations do not qualify for a deduction for reasonable business expenses, and any dividend income is taxed like regular income to shareholders.
An LLC in Tennessee is required to have a registered agent who will process business on behalf of the business. This agent must be listed with the Division of Business Services. Although a small business owner can appoint another person to act as the registered agent, this costs money and can add up quickly.
Limited number of owners
In Tennessee, you can elect to tax your LLC as a corporation and pay excise taxes instead of as an individual. This option is attractive to many businesses that otherwise have high personal tax obligations. An LLC also provides a certain level of asset protection for its owners, but you will still want to purchase insurance for your company. Worker's compensation insurance and other policies may be required by state or local law.
When you form your Tennessee LLC, you'll need to obtain an employer identification number (EIN) from the Internal Revenue Service. This number is similar to a Social Security number but serves as your business's federal tax number. You'll need it to hire employees and set up a bank account. It will also help you obtain a Tennessee sales tax number. Besides that, the state has a special program for new businesses called the Investment Credit. Through this program, you can save 10-20 percent on your power bill every year for five to ten years.
Limitation on classes of equity
Tennessee LLCs are subject to a $300 annual report fee. The tax treatment of an S corporation is better than that of a C corporation. As a pass-through entity, LLC income is not taxed at the corporate level, but rather is reported to the owner of the business on their personal tax return. By contrast, a corporation pays tax on its own income prior to disbursing dividends to its shareholders. Furthermore, a corporation does not qualify for a reasonable business expense deduction. Dividend income is taxed at the individual shareholder's tax rate.
The Tennessee Secretary of State also requires an Articles of Organization for the organization to be registered. There are a few requirements to file Articles of Organization, and a $50 filing fee for up to six members. The Tennessee Secretary of State reports the businesses' records and keeps them up to date. The report helps creditors and others find out the address of the company, and helps keep track of state taxes.
Taxability
Tennessee law allows for the formation of LLCs. These entities are similar to corporations, but differ in some areas, such as taxation. LLCs are pass-through entities, meaning that their income passes through to their owners, rather than being taxed at the corporate level. However, in Tennessee, LLCs are still required to pay employee taxes. Some of these taxes go to the federal government, while others go directly to the state.
While federal and Tennessee law are nearly identical in terms of entity classification, the taxation of LLCs in Tennessee can be more confusing. Tennessee applies a franchise tax and excise tax, which is similar to the federal guidelines. If you operate a business in Tennessee, it's crucial to know the rules for filing taxes for your LLC.
Incentive programs
The government of Tennessee has several tax incentive programs for LLCs, which can be very advantageous to start-up businesses. Among these are tax credits, grants, and loans. In addition, the state offers Opportunity Zone programs for businesses, and it offers help with infrastructure and facilities improvements. However, there are also some disadvantages to setting up an LLC in Tennessee.
First, an LLC must register with the Tennessee Department of Revenue. It also owes franchise tax and excise tax. Both are based on the book value of tangible personal property and the net earnings of the company. The minimum franchise tax for a registered business is $100.
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