How to Start a Sole Proprietorship in Tennessee

Last updated: March 16th, 2024
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If you want to start a business in Tennessee, establishing a sole proprietorship is a simple and straightforward option. In this guide, we’ll walk you through the steps to start a sole proprietorship in Tennessee, from choosing a business name to obtaining the necessary licenses and permits. We’ll also discuss the differences between a sole proprietorship and a Limited Liability Company (LLC) and provide useful resources to help you.

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What is a sole proprietorship?

A sole proprietorship is an informal business structure where an individual operates a business as the sole owner. It is the simplest and most common form of business ownership, popular with startups and entrepreneurs.

It is characterized by its ease of setup and minimal legal requirements. The business and the owner are treated as the same legal entity. As a sole proprietor, you have full control and decision-making authority over your business, but you are personally liable for any debts it incurs.

A step-by-step guide to starting your Tennessee sole proprietorship

1

Choose a business name

The first step in starting a sole proprietorship is choosing a business name. As a sole proprietor, you can use your legal name or a trade name. Trade names are often referred to as a “doing business as” (DBA) name, or an assumed name in Tennessee.

If you decide to use an assumed name, it’s important to ensure that another registered business in the state does not already use it.

Here are the steps to registering your DBA name:

  1. Choose a business name: Crafting a business name that conveys what you sell or your services can be a powerful marketing strategy. Helping in creating your brand’s unique identity and growing your customer base.
  2. Check availability: After you have thought of a few business names, you need to check that they are available in Tennessee.

There are two key resources to check:

  1. Check online availability: Having aligned websites and social media handles is a good idea as it makes your business seem more professional and easier for potential customers and clients to find. See if your business is available as a .com domain and if popular social media handles are available.
  2. Register the business name: Once you’ve confirmed the availability of your chosen name, you may need to register it as an assumed name with your county clerk’s office.

Your county clerk will have the details on their local registration procedure and any associated filing fees you may need to pay to make your assumed business name official.

2

Obtain an (Employer Identification Number) EIN

As a sole proprietor, you may not be required to obtain an EIN, especially if you have no employees. In such cases, you can use your Social Security Number (SSN) as your tax ID. However, obtaining an EIN can provide privacy benefits and help streamline certain business operations.

  • Opens up business banking opportunities: Obtaining an EIN enables the opening of dedicated business bank accounts, credit cards, and financing.
  • Helps establish business credit: An EIN allows building business credit rather than relying solely on personal credit history.
  • Eases the hiring process: Getting an EIN distinguishes the business finances and tax documentation from the owner’s finances.
  • Enhances business privacy: Using an EIN instead of an SSN on business documents enhances privacy protections.
  • Prepares for business growth: An established EIN can simplify future transitions to more structured business entities.

You can apply for your EIN here.

3

Obtain Tennessee business licenses, permits, and zoning clearances

  • Tennessee sole proprietors do not need a general business license. 
  • You may need to apply for additional licenses depending on your business activities.  
  • The Tennessee Department of Revenue registrations and licensing page and the Tennessee Department of Commerce and Insurance regulate various professional and occupational licenses.
  • In addition to state licenses, you may also need to obtain licenses or permits at the local level. Each city and county in Tennessee may have specific requirements, so you must check with your local government offices or visit their websites for information on local licenses and permits.
  • Certain types of businesses may sometimes require federal licenses or permits. You can visit the US Small Business Administration’s website to determine if your business meets federal licensing requirements.
4

Register for taxes

As a sole proprietor in Tennessee, you must report your business income and expenses on your personal tax return using Form 1040. To detail your business activities, you’ll need to attach a Schedule C to your Form 1040, which outlines your business profits or losses.

In addition to income tax, you’ll also be responsible for self-employment taxes for Social Security and Medicare. These are calculated and reported on Schedule SE.

Access the current versions from the Internal Revenue Services (IRS) website of Form 1040Schedule C, and Schedule SE here.

Additional state and local taxes

The sales tax and use tax are the most common state taxes for sole proprietors in Tennessee. However, additional taxes, such as excise and franchise taxes, may also apply depending on your business’s nature.

To determine your state-level tax requirements, consult the Tennessee Business Tax manual or visit the Business Tax section of the Tennessee Department of Revenue website, which has an e-filing option to register for taxes online.

Depending on your business’s location, you may also be subject to local taxes imposed by municipalities or counties. It’s important to research and understand any additional tax obligations at the local level.

Additional steps

Completing your EIN application, federal tax registration, and securing necessary licensing checks the core boxes for establishing your sole proprietorship. With the legal basics covered, it’s wise to take extra steps to set up your new business for ongoing success.

5

Open business bank accounts

Keeping your business and personal finances separated is key for accurate recordkeeping and protecting your personal assets. Think about opening:

  • Business bank account: A dedicated business account to manage income, expenses, and transactions maintains clear separation from your funds. This also lends credibility when working with vendors or applying for financing.
  • Business credit card: Opening a card in your business’s name further segments spending and builds credit history specific to your company’s financial profile.
6

Get liability insurance

Because sole proprietors have no liability protection for all debts and obligations of the business, they should consider taking out an insurance plan. A business liability insurance policy can offer financial protection against unforeseen events.

  • General business liability insurance: This insurance covers property damage, bodily injury, and personal injury claims against your business.
  • Professional liability insurance: Professional liability insurance can protect you from claims of negligence or errors if you provide professional services, such as consulting or advising.
7

Maintain detailed records

Careful recordkeeping helps maximize tax deductions and organize your sole proprietorship’s finances. Be sure to track:

  • Income
  • Expenses
  • Assets/liabilities
  • Inventory
  • Receipts

Using bookkeeping software, spreadsheets, or an organized system makes staying on top of documentation easier for tax filing and general financial health.

Sole proprietorship vs. LLC

For some small businesses or startups, forming an LLC may be preferable to a sole proprietorship.

Here are some key advantages an LLC holds:

  • Liability protection: LLCs legally separate your personal and business assets. Sole proprietorships do not.
  • Credibility: An LLC’s structure appears more professional with customers.
  • Growth potential: LLCs are better suited if you plan to expand your business.
  • Tax flexibility: LLCs allow you to choose how your business is taxed. Sole proprietorships do not.

However, there are tradeoffs to consider:

  • Complexity: LLCs require an operating agreement and annual reporting. Sole proprietorships have less paperwork.
  • Cost: LLC formation and maintenance fees are higher than a sole proprietorship.

Tips:

  • Consult a tax professional to decide which structure best fits your business.
  • Weigh liability protection vs. simplicity based on your goals and risk factors.

FAQs

Do I need a registered agent for my sole proprietorship in Tennessee?

Unlike other business structures like LLCs or corporations, sole proprietorships in Tennessee typically do not require a registered agent.

How do I hire employees for my sole proprietorship?

You must obtain an EIN from the IRS to hire employees. You’ll be responsible for withholding taxes and may have to comply with other employment laws and regulations.

What is personal liability in the context of a sole proprietorship?

Personal liability means that you, as the owner of the sole proprietorship, are personally responsible for all the business debts and obligations. This means your personal assets, such as your home and bank accounts, could be used to cover business debts in case of financial trouble.

Can I convert my sole proprietorship to an LLC in the future?

Yes, converting a sole proprietorship to an LLC in Tennessee is possible. However, the process involves multiple steps and filings with various state departments and local governments. It’s recommended to consult with legal and financial professionals for guidance on this transition.

Do I need liability insurance for my sole proprietorship? 

While liability insurance is not legally required for sole proprietors in Tennessee, protecting your assets from potential liabilities is highly recommended. Consult with insurance providers to determine the coverage options that best suit your business’s needs.

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