An obligated member entity in Tennessee is a limited liability company, limited partnership, or limited liability partnership whose members or partners have all accepted full personal liability for the business’s debts. In return, the entity is exempt from Tennessee’s franchise and excise tax. The trade is blunt: you drop the liability shield that your LLC or LP normally provides, and the state stops taxing the entity at 6.5 percent of taxable income plus 0.25 percent of net worth.
What the Exemption Is Actually Worth
Tennessee imposes two separate taxes on most entities that offer limited liability. The excise tax takes 6.5 percent of Tennessee taxable income. The franchise tax takes 0.25 percent of Tennessee net worth.1Tennessee Department of Revenue. Due Dates and Tax Rates Starting in 2024, the franchise tax is computed solely on net worth; the legislature repealed the property measure that used to apply as an alternative floor.2Tennessee Department of Revenue. Important Notice: Franchise Tax Property Measure Repeal OME status wipes out both taxes. For a profitable business, that is the entire reason to consider the designation.
Who Qualifies
Tennessee Code § 67-4-2004(34) sets the definition, and § 67-4-2008(a)(9) houses the exemption itself.3Justia. Tennessee Code 67-4-2004 – Parts 20 and 21 Definitions4Justia. Tennessee Code 67-4-2008 – Exemptions Three conditions have to be met at the same time.
First, the entity has to be an LLC, limited partnership, or limited liability partnership. Corporations are not eligible.
Second, every member or partner must be fully liable for the entity’s debts, obligations, and liabilities. If even one member keeps limited liability protection, the exemption fails for at least the share of income and equity tied to that member.
Third, the entity must file documentation with the Tennessee Secretary of State reflecting that the members have accepted full liability. In practice, that means articles of organization or an amendment carrying the liability waiver language, and operating agreement provisions establishing the personal obligation. Every member’s name should appear in those filings.
Tiered Ownership Is Looked Through
You cannot hide a limited liability shield one level up. Under § 67-4-2008(a)(9)(D), if any obligated member, or any owner of an obligated member, provides limited liability protection, the entity owes franchise and excise tax on the share of income and equity attributable to that member.4Justia. Tennessee Code 67-4-2008 – Exemptions An ordinary corporation holding even a small piece of the OME triggers tax on that slice.
The statute carves out estates, trusts that are not themselves taxpayers, not-for-profit entities, and entities already exempt under § 67-4-2008. Those are not treated as providing limited liability protection for this purpose, so a trust holding a membership interest does not automatically disqualify the entity.4Justia. Tennessee Code 67-4-2008 – Exemptions
What You Give Up
Full personal liability means that if the business defaults on a loan, loses a lawsuit, or cannot pay a vendor, creditors can pursue each member’s personal assets. There is no corporate veil to pierce because the members have voluntarily removed it. The entity keeps the organizational form of an LLC or LP but takes on the liability profile of a general partnership.
There is a second, less obvious cost. Tennessee LLC members normally enjoy charging order protection: a personal creditor of a member can only obtain an order directing the LLC to pay that member’s distributions to the creditor, not seize the membership interest or reach entity assets. When members have already accepted full personal liability for the entity’s debts, the reasoning behind that protection weakens considerably. Anyone considering OME status should talk through this with an attorney before filing.
When the Trade Makes Sense
The math works only when the franchise and excise tax savings outweigh the increased liability exposure. A small family operation with low litigation risk and modest debts can save meaningful money each year. A business with significant contracts, employees, or potential tort exposure rarely sees savings large enough to justify handing creditors direct access to personal assets.
How to Claim the Exemption
The application is Form FAE183, “Application for Exemption/Annual Exemption Renewal.” This is not Form FAE170, which is the standard franchise and excise tax return. You can file FAE183 through the Tennessee Taxpayer Access Point (TNTAP) without creating a login, or mail it to the Department of Revenue.5Tennessee Department of Revenue. Entities Exempt from Franchise and Excise Tax
Submit the Secretary of State documentation that shows all members have accepted full liability, along with the relevant operating agreement provisions.6Tennessee Department of Revenue. FAE183 – Application for Exemption/Annual Exemption Renewal The form carries a signature under penalty of perjury. Make sure the effective date you claim on FAE183 matches the dates on your Secretary of State filings; mismatches are a common cause of delay.
Deadline
The initial application and every annual renewal are due by the 15th day of the fourth month after the end of the entity’s fiscal year. For a calendar-year entity, that is April 15.6Tennessee Department of Revenue. FAE183 – Application for Exemption/Annual Exemption Renewal A missed deadline can draw a $200 penalty, though the commissioner can waive it for good cause.4Justia. Tennessee Code 67-4-2008 – Exemptions
Keeping the Exemption Year to Year
OME status is not permanent. You must file FAE183 every year to certify that the entity still meets every requirement.5Tennessee Department of Revenue. Entities Exempt from Franchise and Excise Tax
Membership changes require immediate action. A new member has to accept full personal liability too, and the Secretary of State filings have to be updated to show it. If the new member keeps limited liability protection, the exemption fails for at least the portion of income tied to that member’s interest.4Justia. Tennessee Code 67-4-2008 – Exemptions Updated documentation should go to both the Secretary of State and the Department of Revenue right away.
What Happens If You Lose It
If the entity fails to meet the requirements for a year, it becomes taxable on all of its activity for that entire year. It then has to file a standard FAE170 electronically and pay the tax by the 15th day of the fourth month after the close of the taxable year.6Tennessee Department of Revenue. FAE183 – Application for Exemption/Annual Exemption Renewal
Anyone who claims the exemption without qualifying owes the full tax, penalty, and interest that would otherwise apply.4Justia. Tennessee Code 67-4-2008 – Exemptions That is not a prospective correction. The bill covers the tax year as if the exemption had never applied, plus penalties and interest accrued since.
No Effect on Federal Tax
OME status is a Tennessee classification only. It does not change how the IRS treats the entity. A multi-member LLC that qualifies as an OME still files federal Form 1065 as a partnership and issues Schedule K-1s to each member.7Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income A single-member LLC with OME status is still a disregarded entity federally, with business income reported on the owner’s Schedule C. Federal income tax and self-employment tax are unchanged.