Opening a Business in Tennessee
Ready to begin a Sole Proprietorship in Tennessee? The information provided in this blog applies to those who would like to start a business on their own and get set up as soon as possible. If your business may not need partners or liability protection and you decide that sole proprietorship is for you, it could be time to take a look at the next steps.
Perhaps you’re turning a hobby into a side hustle or maybe you’re ready to go “all in” on your business idea. Before you can begin, there are several aspects to consider, organize, and register for. Some of these considerations are specific to creative or craft-based business owners and some apply across a range of industries.
EIN Registration
You are not required to pay for an Employer Identification Number as the IRS website provides a free form which you can easily fill out online. This will ensure that you have a 9-digit tax identification number which is separate from your social security number. Although a sole proprietor is not required to have an EIN and can use their social security, it is still a good idea because you are then not passing your SSN out to everyone. Having an EIN is essential when your business grows, including for the following situations:
Hiring employees
Investing in a solo 401(k) retirement plan (read more about 401(k)s here)
Some banks may require an EIN instead of a SSN
Incorporation later down the line
Business License
Again, a business license may not be required for some companies, but those in the product-making-and-selling industry are likely to require one. In short, obtaining a business license permits an enterprise to operate within the agreed standard conditions.
In Tennessee, you will apply for a license in the city and county your business is located. In Memphis, the cost is $15 for the City and $15 for the County. This is an initial fee and gets you in the state system. Your license is renewed annually after you file your state business tax return if applicable.
The Tennessee Department of Revenue website provides insight into which business license is required for each business type at varying scales of profit, but in summary, there are three types of business licenses:
Minimal activity license for gross receipts of between $3,000 and $10,000 annually
Standard business license for gross receipts passing $10,000 threshold
Out-of-State taxpayer with substantial nexus and gross receipts passing $10,000
Resale Certificate
Obtaining and presenting a resale certificate permits a vendor to buy items tax-free to then collect sales tax at a later date when the same item is sold. For example, let’s imagine you are a soap maker who buys raw components such as lye, oils, and fragrances. By presenting a resale certificate upon purchase, you can avoid paying sales tax on the items. Then, when you are selling the soap made from these ingredients, the sales tax is collected by you. Since the responsibility for collecting and paying Sales Tax falls on the seller (not the buyer), you would be required to present your Resale Certificate when initially purchasing the item(s).
A resale certificate is important as it prevents sales tax being collected more than once for the same item. This can be beneficial for you as you avoid paying Sales Tax on the initial purchase before collecting it in the final sale. Tennessee-based businesses can apply for a Resale Certificate from the Department of Revenue.
Click here to learn more about whether your business will require a resale certificate or should be paying use tax depending on whether your business follows a consignment or wholesale model.
Personal Property Tax
Personal Property Tax broadly applies to items that are purchased to aid a business in running, which are moveable and not attached to a building or home. This also applies to tangible personal property, including items such as furniture and computers.
In Tennessee, this process is broken down by business owners completing a personal property schedule annually, where they may declare the value of personal property.
An appointed county assessor then calculates your assessment and, in Tennessee, generates a value at 30% of the personal property-related purchases you have made. However, this is not your tax bill, you are only required to pay a percentage of tax on this 30%, charged by your local county. For example, in Shelby County, the rate is 4.05%, which equates to $12.15 on the minimum claim of $1000 in value of property used in your business.
Starting a new business doesn’t have to be daunting. If you’d like some more financial guidance, feel free to contact me here.
The information is intended for informational purposes only and is not intended to provide tax, legal, or investment advice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.