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So, You Want to Start a New Business in Tennessee
The 2012 NFL Rookie of the Year once tweeted, “Know Your Why!” This may be one instance when what is true in football is also true for business: the most important part of starting a new business is asking the question “Why?” You have already done that, either directly or indirectly, in coming up with the idea for the business. Don’t stop asking it. Here are a few “why’s” to consider.
Why should I consult with an attorney and an accountant early in the process?
Although creating a new business is relatively straightforward, choosing the correct form for your business is harder. We have all heard terms such as “partnership,” “LLC,” “S-corp.,” etc., but each of these terms refers either to a form in which people do business or an entity that is considered its own legal “person,” separate from the people who own it.
In Tennessee, the business forms for a single owner are the sole proprietorship, LLC, and corporation. For multiple owners, there are the general partnership, LLC, corporation, limited partnership, and limited liability partnership. You should consult an attorney and an accountant early in the process so that you understand the differences and how they will impact the way you do business.
Why are there so many choices?
The answer is simple: liability and taxation. Liability and tax consequences should be factors in your decision-making throughout the life of your business. The interplay of liability and taxes is too complex to address in this article, but generally, each of these forms address liability and taxation differently.
For example, sole proprietorships and general partnerships offer no liability protection for their owner(s), but other forms (LLC, corporation, etc.) do. Similarly, each form falls into at least one tax category at the federal level and some may be exempt from certain state-level taxation. Each form comes with a trade-off on liability and taxation. Choosing the wrong form can have significant negative consequences in liability protection, taxation, or both.
Why can’t I just open for business?
Liability can be addressed through a combination of the appropriate business form, insurance, and compliance with any legal requirements (including taxes). Once you have chosen the proper form, you should focus on compliance. The most common “next steps” are requesting a Federal Employment Identification Number and obtaining business license(s) for the state and municipality where you are doing business. Depending on your business, you may need additional permits or licenses.
For example, if you start a microbrewery, you need more than a business permit. You need additional federal, state, and local permits. These permits take time and have restrictions that need to be considered when choosing the form of business. So, as you are having those initial meetings with your business attorney and accountant, make sure they know the products and services your business will provide. They can help you choose the right entity and obtain the necessary permits so that you can be successful from Day 1.
Our thanks to attorney Nicholas J. Chase for the content of this article. Mr. Ellis is a shareholder at Egerton, McAfee, Armistead & Davis, P.C. and he teaches Mergers & Acquisitions at the University of Tennessee College of Law.
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