Tennessee LLC vs. Sole Proprietorship: Liability, Costs, and Taxes

Choosing between a Tennessee LLC and a sole proprietorship comes down to one question: are you willing to pay several hundred dollars a year, plus Tennessee’s franchise and excise tax on your profits, to keep your house, car, and savings out of reach if the business is sued or can’t pay its debts? A sole proprietor and the business are the same legal person, so personal assets are exposed. An LLC separates the two under Tennessee’s Revised Limited Liability Company Act. Everything else about the comparison flows from that split.

The Liability Difference Is the Whole Point

As a sole proprietor, every contract you sign and every debt the business takes on is yours personally. A creditor with a judgment can reach your bank accounts, your vehicle, and your home. There is no legal wall between the business and you.

Tennessee law puts that wall up for LLCs. The debts and liabilities of the LLC belong to the entity, and members have no personal obligation for them.¹ The protection continues after the LLC dissolves and extends to managers, officers, and employees. A member can still be held personally responsible for their own wrongful acts, but that is narrower than carrying every business obligation on your back.

Tennessee is more protective than many states on one specific point: failing to observe corporate formalities is explicitly not grounds for piercing the LLC’s liability shield.¹ Courts can still strip the shield in extreme cases, and the Tennessee Supreme Court has said doing so requires control over the entity, wrongdoing by the owner, and a causal link between the two.² In practice, the behaviors that invite trouble are predictable. Mixing personal and business funds in one account. Running the LLC with so little capital it could never realistically cover its obligations. Treating the entity as a personal wallet. A dedicated business bank account, documented major decisions, and adequate funding go a long way toward keeping the shield intact if it is ever tested.

What You Pay to Form Each One

A sole proprietorship is the default. You file nothing with the Tennessee Secretary of State. If you start doing business as an individual, you are a sole proprietor by operation of law. You will likely need a local business license from the county clerk where you operate, and if you plan to use a business name other than your own legal name, you may need to register an assumed name at the county level. That is essentially it.

Forming a Tennessee LLC means filing Articles of Organization (Form SS-4270) with the Secretary of State.³ The fee is $50 per member, with a $300 minimum and a $3,000 maximum.⁴ A single-member LLC pays the same $300 as a six-member one; the per-member price only matters above six.

The Articles of Organization must include the LLC’s name, the street address and name of a registered agent, the principal office address, and whether the LLC will be member-managed, manager-managed, or director-managed.⁵ If you have more than six members at filing, you must disclose the number.

Registered Agent

Every Tennessee LLC must continuously maintain a registered agent in the state. The agent can be a Tennessee resident, a domestic business entity, or a foreign entity authorized to do business here, and the office must be a physical street address.⁶ Naming yourself is free but means being available at the listed address during business hours. Professional services typically run $50 to $150 a year. Sole proprietorships have no registered agent requirement.

What You Pay Every Year After That

This is where the two structures separate sharply. A sole proprietor’s compliance load amounts to keeping the local business license current and filing federal taxes. An LLC owes real money every year even if it earns nothing.

Annual Report

Tennessee LLCs must file an annual report with the Secretary of State by the first day of the fourth month after the close of their fiscal year, which is April 1 for a calendar-year LLC.⁷ The fee mirrors formation: $300 minimum, $50 per member beyond six, $3,000 cap.⁴

Missing the deadline matters more than most owners realize. An LLC that fails to file can be administratively dissolved and placed in inactive status.⁴ An inactive LLC loses the liability protection that made it worth forming. Losing your registered agent triggers the same result. These are the most common ways small LLCs lose their good standing.

Franchise and Excise Tax

Tennessee imposes a franchise and excise tax on entities that offer their owners limited liability. LLCs fall squarely within that scope. Sole proprietors are exempt because they do not provide limited liability.⁸

The tax has two parts:

Franchise tax of $0.25 per $100 of the LLC’s net worth, with a $100 minimum.⁹
Excise tax of 6.5% of net earnings from Tennessee operations.¹⁰

The return is due on the 15th day of the fourth month after your fiscal year closes (April 15 for calendar-year filers), with a seven-month extension available.¹⁰ Even an LLC with no earnings still owes the $100 minimum as long as it exists with the Secretary of State.¹¹ The obligation ends only when the LLC is properly dissolved. Having your charter revoked or going inactive does not stop the clock.

Tennessee is unusual in taxing pass-through entities directly. Most states and the federal government let LLC income flow through to the owners’ returns without an entity-level tax. In Tennessee, the excise tax is the single biggest ongoing financial disadvantage of operating as an LLC rather than a sole proprietor.

Federal Taxes Look the Same

Tennessee has no state income tax on wages or business earnings, so federal taxes are the main income tax concern either way. A single-member LLC is treated by the IRS as a “disregarded entity” and files exactly as a sole proprietor does, reporting income and expenses on Schedule C of the owner’s personal return.¹² A multi-member LLC files as a partnership by default. Either can elect to be taxed as an S corporation or C corporation, which is a separate analysis.

Both sole proprietors and single-member LLC owners owe self-employment tax at 15.3% on net earnings (12.4% Social Security plus 2.9% Medicare).¹³ An additional 0.9% Medicare tax applies once combined earnings exceed $200,000 for single filers or $250,000 for joint filers. Forming an LLC as a disregarded entity does not reduce self-employment tax at all. The IRS treats you identically to a sole proprietor on this point.¹²

Sole proprietors without employees can use their Social Security number. Once you hire employees, form a partnership, or create an LLC, you generally need an Employer Identification Number from the IRS.¹⁴ If you are forming an LLC, file the Articles of Organization first; applying for an EIN before the entity exists can delay things.

How Each Structure Is Run

A sole proprietor makes every decision. No votes, no meetings, no paperwork. For a one-person service business, that speed is genuinely valuable.

Tennessee LLCs have three management options, and you pick one in your Articles of Organization: member-managed, manager-managed, or director-managed.⁵ In a member-managed LLC, every member has equal say and decisions go by majority vote. In a manager-managed LLC, one or more designated managers run the business while other members stay passive, with managers appointed or removed by a majority of members.¹⁵

Tennessee law requires a written operating agreement for director-managed LLCs and makes it optional for member-managed ones.¹⁶ “Optional” is misleading. An operating agreement sets profit-sharing, voting rights, what happens when a member wants out, and how disputes get resolved. Without one, the statutory defaults apply, which may not match what you and your co-owners actually agreed to. For a single-member LLC the stakes are lower. For any LLC with two or more members, skipping it invites expensive conflict later.

Which One Fits Your Situation

The yearly cost gap for a single-member LLC runs roughly like this:

Formation: $0 for a sole proprietorship, at least $300 for an LLC.
Annual report: none for a sole proprietor, at least $300 for an LLC.
Franchise and excise tax: exempt for sole proprietors, $100 minimum for an LLC plus 6.5% of Tennessee net earnings.
Registered agent: not required for sole proprietors; free if you serve yourself, otherwise around $50 to $150 a year.
Federal income tax: identical for a disregarded-entity LLC and a sole proprietorship, including self-employment tax.

At minimum, a Tennessee LLC costs about $400 more per year than a sole proprietorship before the excise tax on earnings. A profitable business widens that gap. If your work carries real risk of lawsuits (anything involving customers on premises, physical products, employees, significant contracts, or professional advice) the liability shield is usually worth the price. If you are a solo freelancer with low liability exposure and thin margins, the sole proprietorship’s zero overhead may make more sense until the business grows into the LLC’s cost.

1
FindLaw. Tennessee Code Title 48 Corporations and Associations 48-249-114
2
Tennessee Courts. Tennessee Supreme Court Clarifies Legal Requirements for Holding Company Shareholders
3
Tennessee Secretary of State. Business Forms and Fees
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Tennessee Secretary of State. Frequently Asked Questions for Businesses
5
Justia. Tennessee Code 48-249-202 – Articles of Organization
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Justia. Tennessee Code 48-208-101 – Registered Office and Registered Agent
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Justia. Tennessee Code 48-249-1017 – Annual Report for Secretary of State
8
Tennessee Department of Revenue. Franchise and Excise Tax Manual
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Tennessee Department of Revenue. FT-13 – Property Measure Repeal
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Tennessee Department of Revenue. Due Dates and Tax Rates
11
Tennessee Department of Revenue. Franchise and Excise Tax
12
Internal Revenue Service. Single Member Limited Liability Companies
13
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
14
Internal Revenue Service. Get an Employer Identification Number
15
Justia. Tennessee Code 48-249-401 – Management of LLC
16
Justia. Tennessee Code 48-206-101 – Operating Agreement