If you’re currently self-employed in the state of Tennessee, or if you’re looking to enter the world of one-person business ownership, you’ve probably looked into becoming a sole proprietor.
The sole proprietorship is the simplest business ‘format’ in America, but that doesn’t mean that there aren’t rules and regulations to follow when you operate one. In addition, there are some limits to the functionality of a sole proprietorship.
In this guide, we’ll help you determine whether or not the sole proprietorship is a good choice for your business.
What Is a Tennessee Sole Proprietor?
As opposed to a corporation or limited liability company (LLC), the sole proprietorship is not a legal business entity. The sole proprietorship is a one-person business that is not considered to be a distinct entity from the person who owns it, and it is frequently operated using the owner’s personal name.
Here are the three main things you need to know:
Because there’s no distinction between the owner and the business itself, sole proprietors don’t need to file business tax returns ― they instead simply claim any business profits or losses on their personal tax returns.
Sole proprietors are allowed to sign contracts using their personal name, and along those same lines, customers can write checks to the business by using the sole proprietor’s name.
The other big difference between sole proprietorships and more formal business structures is the fact that sole proprietors are allowed to commingle business and personal assets as much as they want to. With LLCs and corporations, ownership is required to keep their assets separate from those of the company. The downside of this aspect for sole proprietors is that if your business is sued, creditors are free to pursue your personal assets like your house, car, personal bank accounts, etc. For corporations and LLCs, creditors are limited to your business assets.
How to Become a Tennessee Sole Proprietor
When it comes to being a sole proprietor in the state of Tennessee, there is no formal setup process. There are also no fees involved with forming or maintaining this business type. If you want to operate a Tennessee sole proprietorship, all you need to do is start working.
However, just because it’s so easy to get started doesn’t mean there aren’t some additional steps you should take along the way. While these parts of the process aren’t strictly required, many sole proprietors find that they are in their best interests.
A doing business as (DBA) name is a crucial part of many sole proprietorships, as it enables you to use an assumed name for your business, rather than your own personal name. The advantages of acquiring a DBA start with image ― most customers feel that an assumed name is more professional and trustworthy than doing business with a company that uses its owner’s personal name instead.
That said, sole proprietors can sign up for a business bank account using their DBA name, which is another step that goes a long way toward making customers feel more comfortable doing business with you.
In Tennessee, DBAs are sometimes referred to assumed names.To claim one, you should first check the business name availability using the state’s Business Name Availability Search. Then, you may register it with the state through the online Business Filings Wizard.
Determine Taxation Requirements
Sole proprietors without employees usually don’t need to acquire a federal tax ID number (EIN), because as a one-person business, you can typically just use your own social security number for most things an EIN is used for. Still, if you would rather not use your SSN for privacy purposes, it would be a good idea to get an EIN regardless.
Beyond that, the nature of your business will determine which taxes apply to you as a sole proprietor.
Your sole proprietor business taxes consist of both state and local taxes.
State taxes commonly include sales and use tax. However, additional taxes (such as excise tax and franchise tax) may also be necessary depending on the nature of your business. To determine your state-level tax requirements, you’ll want to either consult the Tennessee Business Tax Guide or visit the Business Tax section of the Tennessee Department of Revenue.
Depending on the location of your business, you may also need to pay local taxes. To discover if your business is located in a city or county which has additional business tax, consult this comprehensive city business tax list. You may also choose to visit your municipalities local government website to ensure all local taxation requirements are met.
Obtain Business Licenses and Permits
There isn’t a requirement in Tennessee for sole proprietors to acquire a general business license, but depending on the nature of your business you may need other licenses and/or permits to operate in a compliant fashion.
Which state-level licenses your business requires will depend on what goods and services you offer. Most state-issued licenses are industry based. For example, electricians, real estate appraisers, motor vehicle operators, locksmiths, and accountants will all need a specific license to operate lawfully. For a more complete list of industries that require licenses and further details on your sole proprietorship’s licensing needs, visit the Licenses & Permits Section of the Tennessee State Government.
In addition, you should check to see if your business needs any licenses or permits on the local level.
Additionally, if your taxable sales are more than $10,000, you are required to obtain a standard business license from your county clerk. Even if your taxable sales is less, you may be required to obtain a minimal activity license from your county. More information on both of these licenses can be found on the Registration and Licensing Section of the Department of Revenue website.
While the sole proprietor is such a simple business classification that Tennessee doesn’t even require a business registration process or any type of fees, depending on how you use your sole proprietorship and what industry you operate in, you still might have some important steps that need to be taken.
When it comes to issues of taxation, licenses and permits, or even the name you want to call your sole proprietorship, you do need to be vigilant to make sure you’re not overlooking anything.
We hope this guide helped you answer any questions you had for sole proprietorships in Tennessee, and we wish you success with your business!