How to Start a Sole Proprietorship in Tennessee

Last updated: March 12th, 2024
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If you live in Tennessee and want to start a business as quickly as possible, creating a sole proprietorship might be your best option. If you already have a viable business idea in mind and have enough capital to start, you can become an owner of a sole proprietorship almost immediately with the help of this article.

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What is a sole proprietorship?

Before we get into how to start a sole proprietorship, you probably want to know what it is first. A sole proprietorship is the simplest form of business entity. Unlike a general partnership or LLC, it is an unincorporated business that is owned and operated by a single individual, known as the sole proprietor. 

Examples of a sole proprietorship

Many small businesses operate as sole proprietorships, including freelance writers, consultants, local retail stores, solo bakeries, barbers, contractors, photographers, and other service providers. From a small bakery to a home-based consulting business, a sole proprietorship can be an ideal business structure for individuals starting out on their own. As long as you can run your businesses by yourself and have the capital to create a viable startup, it can be a sole proprietorship.

What qualifies your business as a sole proprietorship?

In Tennessee, your business is automatically considered a sole proprietorship if you are the only owner and have not registered your business as a different business entity. A sole proprietor has complete control over the business activity and operations. And as the owner, you also take care of the operations and decisions which will help your business grow. With that said, you are also responsible for all aspects of the business, including business debt and liabilities. 

Sole prop vs LLC

A sole proprietorship does not need to be registered with the Tennessee Secretary of State or Tennessee Department of Revenue, which makes it a simple structure that allows any resident to start their business without getting incorporated.

On the other hand, an LLC or limited liability company will need to go through a long process but it comes with benefits such as legal protections that protect your personal assets.

Who is it best for?

A sole proprietorship is ideal for individuals who are starting a small business on their own and do not anticipate significant financial risk or the need for extensive funding. It is suitable for those who value simplicity, autonomy and want to maintain full control over their business operations.

Starting a sole proprietorship in Tennessee can be a relatively straightforward process. By understanding the legal requirements, tax obligations, and licensing requirements, you can set up and operate your business effectively. Remember to consult with professionals such as attorneys, accountants, or business advisors to ensure compliance with all relevant regulations and to make informed decisions throughout your entrepreneurial journey.

How to set up a sole proprietorship in Tennessee

If your business qualifies as a sole proprietorship and is determined that this business type structure is ideal for your industry, it’s time to start creating your sole proprietorship to help you earn money on the side as quickly as possible. 

Is there any formal paperwork filed to register this new business?

There is no specific paperwork required to establish a sole proprietorship in Tennessee. In fact, some business owners can start almost immediately, given the fact that their industry does not require them to get a business license and permits to operate legally.

Name your business

The first step to starting a Tennessee sole proprietorship is naming your business. By default, a sole proprietorship uses the name of the owner since there are no legal distinctions between you and the business. However, you also have the option to use a fictitious business name or trade name when you acquire a DBA from the Secretary of State in Tennessee. Here are your two options:

Using your legal name

You can choose to use your own name, which is the easiest option since you don’t need to do anything further. However, in some industries, using your own name might not sound appealing to potential clients. 

The reason people use their own name is that they want to skip the paperwork of getting an assumed name and start doing business immediately. However, some people choose to use their own name when they are trying to build a personal brand and want to get their name out there for brand recognition. 

Setting up a DBA

If you decide to use a different name, you can get a DBA in Tennessee. Start by thinking of a name that is relevant to your business. The next step is checking name availability by doing a quick name search here.

If the name is available, you can apply for the DBA online using the Tennessee County Clerk’s Website or by visiting the nearest municipality office by completing the Business Tax License Application. The filing fee costs $15 and needs to be renewed every 5 years.  

Obtain state licenses

Now that you have your DBA, you can start doing business right away. But make sure that you get the necessary business licenses and permits for specific businesses like contracting businesses, barbershops, liquor stores, and others. To learn if your business needs specific permits, you can visit the Tennessee Department of Revenue page to learn more and obtain them.

Tennessee taxes

One of the benefits of owning a sole proprietorship is the simplicity of its tax structure. As a sole proprietor, you report your business income and expenses to the IRS on your personal tax return using Schedule C, which is included with your individual income tax return (Form 1040). This form already includes social security and Medicare taxes, and you are not required to file a separate tax return for your business.

As a self-employed individual, you might be entitled to some tax write-offs for your business expenses that can maximize your personal tax return since you will be filing using your social security number without needing a separate filing for your small business. 

Pros

  • It is easy to set up and establish because it involves minimal paperwork with a straightforward process
  • As a sole proprietor, you have complete control over the business without having an annual report with shareholders
  • You can change anything about your business and run it the way to like it
  • The tax simplicity is definitely one of its biggest advantages

Cons

  • Having unlimited liability over business obligations can put your personal assets at risk
  • There is not a lot of room for growth
  • Investors are not very attracted to unstructured or unincorporated businesses like sole proprietorships
  • It can be challenging to manage and make decisions for your business without the help of partners and shareholders
  • Running a Tennessee business can take a lot of your free time, especially if you still have a day job

FAQs

Can sole proprietorships open a business bank account in Tennessee?

Yes, sole proprietorships can open business bank accounts in Tennessee. It is recommended to keep personal and business finances separate for clarity and accurate record-keeping. Plus, transacting with a separate business bank account makes your business appear more trustworthy to potential clients. 

Can you get funding from banks and lenders to open a sole proprietorship in Tennessee?

While obtaining funding for a sole proprietorship may be challenging, it is not impossible. Lenders may consider factors such as your personal credit history, business plan, and collateral when evaluating your loan application.

Can you hire employees for your sole proprietorship in Tennessee?

Yes, sole proprietors can hire employees in Tennessee. However, it is essential to comply with employment tax requirements and provide the necessary benefits and protections to your employees.

What is the most challenging part of running a sole proprietorship?

The most challenging aspect of running a sole proprietorship is the personal liability associated with the business. As a sole proprietor, you are personally responsible for the business’s debts and legal obligations.

Do you need to register your sole proprietorship in Tennessee?

Although there is no formal registration process for sole proprietorships in Tennessee, you may need to obtain certain licenses or permits depending on your business activities. Check with the appropriate state agencies and local municipalities to ensure compliance.

Do you need a separate tax form for your sole proprietorship in Tennessee?

No, as a sole proprietor in Tennessee, you do not need a separate tax form for your business. You report your business income and expenses on your personal tax return using Schedule C.

What else should a sole proprietor consider?

Aside from mandatory business licenses you might need, there are some optional steps you can take that can benefit your business, such as getting a DBA to use a different business name, opening a business bank account to ensure that you can accurately keep track of your business finances, and getting an EIN or employer identification number, which allows sole proprietors to hire employees.  

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