By Jake Lawson, LLC Formation Strategist
Tennessee’s lack of state income tax makes it tempting to think sole proprietorship are a great deal here. After helping over 200 Tennessee entrepreneurs navigate business formation, I can tell you that tax savings alone don’t justify the risks of operating without liability protection.
But I’m not here to lecture you—I’m here to give you the complete picture. If you’re considering a Tennessee sole proprietorship, this guide covers everything you need to know, including the specific Tennessee quirks that other guides miss.
What Is a Tennessee Sole Proprietorship?
A sole proprietorship is the default business structure that kicks in the moment you start doing business activities with the intent to make money. No paperwork, no state filings, no formation fees—you and your business are legally the same entity.
The moment you start taking money for services or products, you’re operating as a sole proprietorship. It’s automatic, whether you realize it or not.
Real-World Tennessee Example:
Marcus starts offering guitar lessons from his Nashville apartment. He posts on social media, prints flyers, and starts teaching students. Even though he hasn’t filed any business paperwork, he’s automatically operating as a sole proprietorship under Tennessee law.
The problem: When one of Marcus’s students trips on a cable in his apartment and breaks their wrist, Marcus’s personal assets—his car, savings, and even his apartment—are at risk in the resulting lawsuit.
The Tennessee Advantage (It’s Not What You Think)
Many entrepreneurs assume Tennessee’s tax structure makes sole proprietorships especially attractive. Let me break down the reality:
The Tax Situation:
Federal taxes: Same as every other state (Schedule C, self-employment tax)
Tennessee state income tax: $0 (Tennessee has no personal income tax)
Tennessee business taxes: Franchise and excise tax for most businesses (but sole proprietorships are often exempt)
Jake’s Reality Check: Yes, no state income tax is nice. But it doesn’t change the fundamental problems with sole proprietorships: no liability protection, credibility issues, and business limitations.
Tennessee Sole Proprietorship vs. LLC: The Honest Comparison
Here’s what the numbers actually look like in Tennessee:
| Factor | Sole Proprietorship | Tennessee LLC |
| Formation Cost | $0 | $300 |
| Annual State Fees | $0 | $300 |
| Franchise/Excise Tax | Usually exempt | Usually exempt (under $3M revenue) |
| Liability Protection | None | Complete |
| Tax Filing Complexity | Simple (Schedule C) | Same (can elect disregarded entity) |
| Business Banking | Difficult | Easy |
| Professional Credibility | Limited | High |
| Growth Flexibility | None | Extensive |
Jake’s Analysis: You’re looking at $600 over two years for significant liability protection and professional credibility. Given Tennessee’s business-friendly environment, that’s a bargain.
When Tennessee Sole Proprietorships Actually Make Sense
Based on my experience with over 200 Tennessee businesses, sole proprietorships work in these limited scenarios:
Scenario 1: Ultra-Low-Risk Testing
- Freelance writing or virtual assistant work
- Online consulting with no physical interaction
- Revenue under $15,000/year
- Plan to upgrade to LLC within 12 months
Scenario 2: Genuine Financial Hardship
- Cannot afford the $300 LLC fee
- Need immediate income to pay bills
- Understanding this is temporary
Scenario 3: Simple Service Businesses (With Caveats)
- No client visits to your location
- No physical products or equipment
- No employees or contractors
- Excellent business insurance coverage
Everything else should be an LLC. Tennessee’s reasonable LLC costs make this an easy decision for most businesses.
How to Start a Tennessee Sole Proprietorship (Step-by-Step)
If you’ve decided sole proprietorship is right for your situation, here’s exactly what you need to do:
Step 1: Business Foundation and Planning
Don’t skip this step just because sole proprietorships are informal:
Define Your Business Model:
- What specific services/products will you offer?
- Who is your target market in Tennessee?
- How will you price competitively?
- Where will you operate? (home, client locations, co-working space)
Choose Your Business Address: This becomes crucial for:
- Tax filings and business correspondence
- Banking applications and credit establishment
- Business license applications (if required)
- Insurance policies and claims
Financial Planning Essentials:
- Startup costs: Equipment, software, initial marketing
- Monthly expenses: Phone, internet, workspace costs
- Revenue projections: Be conservative but realistic
- Tax planning: Set aside 25-30% for federal taxes (no state income tax!)
Step 2: Business Name and DBA Considerations
By default, your sole proprietorship operates under your legal name. In Tennessee, the DBA process is unique and somewhat limited:
Tennessee’s DBA Quirk: Unlike most states, Tennessee doesn’t have a statewide DBA filing system for sole proprietorships. Instead, you can only register an assumed name through local business license applications.
When You Might Want a Business Name:
- Professional branding (“Nashville Web Design” vs. “John Smith”)
- Marketing advantages (easier to remember and promote)
- Business banking (some banks prefer business names)
Tennessee DBA Process:
- Choose your assumed name
- Check local availability (no statewide database)
- File with business license application in your city/county
- Use consistently on all business materials
Jake’s Tennessee DBA Tip: Since there’s no statewide registration, you might have naming conflicts in other Tennessee cities. Consider this if you plan to expand.
Step 3: Get an EIN (Strongly Recommended)
While you can operate using your Social Security Number, getting an EIN makes sense for multiple reasons:
Privacy and Security:
- Protect your SSN from clients and vendors
- Reduce identity theft risk significantly
- Professional appearance on business documents
Banking and Credit:
- Required by most banks for business accounts
- Easier business credit applications
- Separate business credit history
Future Planning:
- Required if you hire employees
- Needed for LLC conversion
- Essential for business partnerships
How to Get Your Free EIN:
- Visit IRS.gov (never pay third parties)
- Complete online application (15 minutes)
- Receive EIN immediately
- Save confirmation letter
Tennessee-Specific Information Needed:
- Your legal name and SSN
- Business name (if different)
- Tennessee business address
- Business start date
- Reason for applying
Step 4: Research Tennessee License Requirements
Tennessee doesn’t require general business licenses for most sole proprietorships, but industry-specific requirements vary:
State-Level Licensing:
- Professional licenses: Through Tennessee Department of Commerce and Insurance
- Health-related permits: Food service, healthcare, personal care
- Transportation permits: Commercial vehicles, ride-sharing
- Environmental permits: Waste management, chemicals
Local Licensing Requirements:
- City business licenses: Varies by municipality
- County permits: Depends on business type and location
- Zoning compliance: Critical for home-based businesses
- Sales tax registration: If selling taxable goods or services
Key Tennessee Resources:
- TN Department of Commerce: tn.gov/commerce/licensing-regulations.html
- TN Department of Revenue: Business registration and licensing
- Local county clerks: For city/county-specific requirements
Jake’s Tennessee License Reality: Nashville, Memphis, and Knoxville have different requirements from smaller cities. Don’t assume what works in one Tennessee city applies statewide.
Step 5: Set Up Tennessee Business Banking
Tennessee banks are generally small-business friendly, but sole proprietorships can still face challenges:
What You’ll Need:
- Photo ID
- EIN confirmation letter (if obtained)
- Business license (if applicable)
- Initial deposit ($25-500 depending on bank)
Tennessee Banks That Work Well for Sole Proprietorships:
- First Tennessee Bank (now First Horizon): Strong local presence, good small business programs
- Pinnacle Bank: Tennessee-based, understands local businesses
- Regions Bank: Reasonable fees, multiple locations
- Local credit unions: Often better rates and personal service
- Online banks: Lower fees but no physical locations
Jake’s Tennessee Banking Strategy: Start with a local bank or credit union. They understand Tennessee’s business environment and are more likely to work with sole proprietorships.
Step 6: Understand Tennessee Tax Obligations
Tennessee’s tax situation is unique and generally favorable:
Federal Tax Requirements:
- Schedule C: Report business income and expenses
- Schedule SE: Self-employment taxes (15.3% of profits)
- Quarterly estimated payments: If expecting to owe $1,000+
Tennessee State Taxes:
- No personal income tax: Your business profits aren’t taxed at the state level
- Sales and use tax: Required if selling tangible goods (varies by location, 7-9.75%)
- Business tax: Franchise and excise tax (most sole proprietorships exempt)
Record Keeping for Tennessee:
- Income documentation: All payments received
- Expense receipts: All deductible business expenses
- Sales tax records: If applicable
- Mileage logs: Business vehicle use
- Home office documentation: If claiming home office deduction
Jake’s Tennessee Tax Advantage: No state income tax means you keep more of your profits, but you still owe federal self-employment taxes. Set aside 25-30% for federal obligations.
Maintaining Your Tennessee Sole Proprietorship
Essential Business Infrastructure
Business Insurance (Critical in Tennessee):
- General liability: $200-400/year, protects against customer accidents
- Professional liability: Covers errors in services
- Business property: Protects equipment and inventory
- Auto insurance: If using vehicle for business
Accounting and Record Keeping:
- QuickBooks Self-Employed: $15/month, designed for sole proprietors
- FreshBooks: Good for service businesses
- Wave: Free basic accounting
- Excel/Sheets: If budget is extremely tight
Legal Protection:
- Client contracts: Protect yourself with clear terms
- Liability waivers: If clients visit your location
- Privacy policies: If collecting customer data
- Terms of service: For ongoing service relationships
Tennessee Compliance Requirements
Federal Requirements:
- Personal tax return: Form 1040 with Schedule C and SE
- Quarterly estimated payments: If applicable
- Client reporting: 1099s for payments over $600
Tennessee Requirements:
- Sales tax filings: If collecting sales tax
- Local license renewals: City/county business licenses
- Professional license renewals: If applicable
Local Requirements:
- City business license renewals: Annual in most Tennessee cities
- Zoning compliance: Ongoing for home-based businesses
- Property tax: On business equipment if significant
When to Convert to a Tennessee LLC
Consider upgrading when you reach these milestones:
Revenue Growth:
- Annual revenue over $30,000
- Consistent monthly profits
- Planning to hire employees
Liability Increase:
- Client visits to your location
- Selling physical products
- Providing services with injury risk
- Working with sensitive data
Professional Development:
- Bidding on larger contracts
- Working with corporations
- Seeking business loans
- Bringing in partners
Tennessee LLC Conversion Process:
- Form Tennessee LLC ($300 + registered agent if needed)
- Get new EIN for the LLC
- Transfer business assets to LLC
- Update contracts and vendor relationships
- Change banking to LLC accounts
- Update licenses and permits
- Notify clients and vendors
Jake’s Tennessee Conversion Timeline: Plan 4-6 weeks and $400-600 in total costs.
Common Tennessee Sole Proprietorship Mistakes
Mistake #1: Assuming No State Income Tax = No Tax Complexity
What happens: Missing sales tax obligations, quarterly payment requirements, or federal compliance.
Real example: A Memphis contractor thought Tennessee’s tax-friendly status meant simple taxes. He missed sales tax registration and owed $8,000 in back taxes plus penalties.
How to avoid: Understand that federal taxes still apply, and sales tax may be required.
Mistake #2: Operating Without Business Insurance
What happens: Personal assets at risk in lawsuits or accidents.
Real example: A Nashville event planner’s client was injured at a venue. The resulting lawsuit threatened the planner’s home equity and savings.
How to avoid: Get general liability insurance immediately—it’s $200-400/year.
Mistake #3: Mixing Business and Personal Finances
What happens: Tax complications, audit risks, poor business tracking.
How to avoid: Open separate business banking immediately, even if it’s just a designated personal account.
Mistake #4: Ignoring Local Licensing Requirements
What happens: Fines, business closure, lost revenue.
Real example: A Knoxville food truck didn’t realize they needed permits from both the city and county health departments. They were shut down during a profitable event.
How to avoid: Research city, county, and state requirements thoroughly.
Mistake #5: Not Planning for Business Growth
What happens: Scrambling to restructure when business outgrows sole proprietorship limitations.
How to avoid: Set clear triggers for LLC conversion (revenue, liability, growth goals).
Tennessee Sole Proprietorship Costs (Real Numbers)
Startup Costs:
- Business formation: $0
- Local business license: $25-200 (varies by city)
- EIN application: Free from IRS
- Business bank account: $0-25/month
- General liability insurance: $200-400/year
- Professional licenses: $50-500 (industry-dependent)
Total startup cost: $275-1,125
Annual Operating Costs:
- Business license renewals: $25-200/year
- Bank account fees: $0-300/year
- Insurance premiums: $200-400/year
- Professional license renewals: $50-300/year
- Accounting software: $0-180/year
Total annual cost: $275-1,380
Compared to Tennessee LLC:
- Additional LLC costs: $300 formation + $300/year
- Benefits: Liability protection, credibility, easier banking, growth options
Jake’s Tennessee Cost Analysis: For $600/year, LLC provides massive value over sole proprietorship risks.
Frequently Asked Questions
Is Tennessee really tax-friendly for sole proprietorships?
Yes and no. Tennessee has no state income tax, which means you keep more profits. However, you still owe federal income taxes and self-employment taxes (15.3%). Plus, if you sell goods, Tennessee’s sales tax rates (7-9.75%) are among the highest in the nation.
Do I need a business license in Tennessee as a sole proprietor?
Tennessee doesn’t require a general state business license, but most cities and counties do require local business licenses. Nashville, Memphis, Knoxville, and Chattanooga all have their own requirements.
Can I have employees as a Tennessee sole proprietor?
Yes, but it’s complex. You’ll need:
- Workers’ compensation insurance
- Unemployment insurance through Tennessee Department of Labor
- Payroll tax compliance
- Employment law adherence
Most sole proprietors who need employees convert to LLCs for simplicity.
How do I register a DBA in Tennessee?
Tennessee doesn’t have statewide DBA registration for sole proprietorships. You can only register an assumed name through local business license applications with your city or county.
What happens if I operate without required licenses in Tennessee?
Penalties vary by jurisdiction but can include:
- Fines of $50-5,000
- Business closure orders
- Inability to collect from clients
- Criminal charges in extreme cases
Should I get business insurance as a Tennessee sole proprietor?
Absolutely. Since sole proprietors have no liability protection, insurance is even more critical. General liability insurance costs $200-400/year and can prevent financial disaster.
Jake’s Final Tennessee Recommendation
After 15+ years helping entrepreneurs and working with over 200 Tennessee businesses, here’s my honest advice:
Consider a sole proprietorship only if:
- You’re testing a very low-risk business idea
- You genuinely cannot afford the $300 LLC fee
- You understand this is temporary (6-12 months max)
- You have excellent business insurance coverage
Choose a Tennessee LLC if:
- You can afford the extra $300 upfront and $300/year
- You want professional credibility with clients
- You have any liability concerns
- You plan to grow beyond a solo operation
The Tennessee advantage: No state income tax means LLCs are even more attractive here—you get liability protection without additional state tax burden.
My recommendation for 90% of Tennessee entrepreneurs: Form an LLC. Tennessee’s business-friendly environment, reasonable LLC costs, and liability protection make it a no-brainer for most businesses.
Tennessee is an excellent state for entrepreneurs. Don’t let the sole proprietorship limitations hold you back from taking advantage of everything the state has to offer.
Jake Lawson has guided over 1,200 entrepreneurs through U.S. business formation, including 200+ Tennessee businesses. His recommendations are based on real client experiences, Tennessee-specific knowledge, and 15+ years of hands-on business formation expertise. For more Tennessee business guidance, visit llciyo.com.
Ready to start your Tennessee business? Whether you choose sole proprietorship or LLC, take action on your business idea. Check out our Tennessee LLC formation guide or compare sole proprietorship vs LLC vs Corporation options.