Tennessee Entity Formation 2010
* Most recent year of statistics from the Secretary of State
LLC Overview:
An entrepreneur in today's business environment should
consider several key factors when determining which business form will work
best in a given situation. Typically, the most important factors include
limited liability, taxation, and organizational flexibility.
Limited Liability:
The Limited Liability Company
("LLC") has become the dominant form for newly-created small and medium sized
businesses in most states in America. In fact, 68% of newly formed for profit
business in Tennessee during 2008 were LLCs, while formation of Corporations
has dropped for 5 years in a row. It is clear that LLC is the entity of choice
for Tennessee's entrepreneurs. The LLC has become so popular due to the fact
that it gives business owners several advantages of the various business forms
in one package. It is a hybrid
which combines the flexibility and taxation benefits of a partnership with the
limited liability protection of a corporation. Much like a corporation, an LLC is a legal entity which
exists apart from its individual owners.
The individuals therefore are not personally liable to creditors of the
business, nor are they personally liable for torts which arise from the
business. The Tennessee Revised Limited Liability Company Act § 48-249-114
specifically provides that "A member, holder, director, manager, officer,
employee or other agent of an LLC does not have any personal obligation, and is
not otherwise personally liable, for the acts, debts, liabilities or
obligations of the LLC."
Financially,
this effectively limits an individual member's financial liability to no more
than their investment in the LLC.
This limit on financial liability for the business owner is very
attractive considering that his or her personal assets cannot be touched in
order to satisfy the debts of the LLC. Only the LLC itself is liable for its
financial obligations.
From a risk
standpoint, an LLC offers similar protection from tort law suits to the
individual owners or members as a corporation does. This simply means that the
members of an LLC are not held liable in legal suits for the wrongs that his
fellow member(s) commit against third parties. Additionally, an LLC limits the
liability of an individual from lawsuits brought by fellow members, directors
or managers of the LLC.
Taxation:
A corporation
is taxed two times; once on its income for the year as a corporation and also
the dividends from the corporation are taxed under Internal Revenue Code
Subchapter C. One of the most exciting aspects about an LLC is that the
Tennessee Revised LLC Act allows business owners to choose how they want the
business to be taxed. The LLC can choose to be taxed like a Corporation or like
a general partnership. A general
partnership is not treated as a separate entity for tax purposes, meaning that
income or loss is passed through pro rata to the partners and taxed to them
individually. Under IRS Code Subchapter K, a general partnership is only taxed
once. The LLC provides the
business owner with several options to choose from regarding taxation. Business owners should seek the advice
of an accountant in regards to the particular tax implications of the Limited
Liability Company.
Organizational Flexibility:
The LLC offers
the greatest organizational flexibility of all the business forms. The LLC is formed by filing Articles of
Organization with the Secretary of State.
While not required, it is highly recommended that an Operating Agreement
be drafted in order to guide the parties in the operation of the business. The
articles of organization are akin to the Declaration of Independence for the
business, while the operating agreement acts like the LLC's Constitution. In the articles of organization and
operating agreement, the LLC owners can choose whether they want the operations
of the business to be flexible and informal like a general partnership or rigid
with formal procedures like a corporation. For the small business, the formalities of a corporation
such as formal board meetings to make decisions, minutes taken at board
meetings, and annual shareholder meetings may not make much sense. The formalities
may be simply impracticable to apply to the daily operations of an LLC
consisting of only a few individuals.
A Tennessee LLC
may choose one of three forms of government: (1) member-managed, in which case
the management of the LLC will be vested in its members; (2) manager-managed,
in which case the management of the LLC will be vested in a manager or
managers; or (3) director-managed, in which case the members will elect a board
of directors in whom management will be vested.
The individual
owners of the LLC have the option of contracting on a variety of issues in the
operating agreement, including: voting powers of the individuals, the ability
to delegate rights and control to other members, and the ability to create
future rights in the LLC to other groups or members. Additionally, through these contractual agreements the LLC
can be made freely transferable in the marketplace, or limitations can be
placed on the transfer of its interest. The LLC can choose to dissolve upon
death of a member, retirement of any member, upon the completion of a specified
event, or the LLC may choose to have an unlimited period of existence. The LLC members also have the
flexibility to finance their new business in various ways. They could personally underwrite the
start up costs, obtain loans from a bank, and even sell interest in the LLC to
outside investors. In sum, the LLC can contractually create a business entity
that is either formal or informal in its operation and the owners can tailor
the conduct of the business to their liking.
LLC Advantages Over A (C) Corporation:
- No Double Taxation
- No Corporate Formalities and Less Paperwork
- More Flexible Management Structures
- PLLC Not Subject To Personal Services Corporation Tax Rates
- No Hall Income Tax
LLC
Advantages Over An (S) Corporation:
- No Corporate Formalities and Less Paperwork
- More Flexible Management Structures
- No Ownership Restrictions ( S Corporation limited to 100 owners and owners must be U.S. citizens)
- Multiple Classes of Ownership Interests (S Corporation is limited to only one class of stock)
- Membership Interests May Be Owned By A Revocable Trust (A Sub S Trust has to be created for a trust to hold S Corporation stock).
- No Payroll Tax Is Necessary For The Members Of The LLC
- No Hall Income Tax