Converting Your Tennessee Sole Proprietorship to an LLC in 2024

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Convert Tennessee Sole Proprietorship to LLC

As a small business owner in Tennessee, you may have started your business as a sole proprietorship due to its simplicity and low initial costs. However, as your business grows, you may want to start an LLC in Tennessee, which is more suitable for your needs. Converting your Tennessee sole proprietorship to an LLC can protect your assets and optimize your business’s growth potential.

In this comprehensive guide, Webinarcare Editorial Team will walk you through the step-by-step process of Converting your Tennessee Sole Proprietorship to an LLC, enabling you to make an informed decision for your business.

How to Convert your Tennessee Sole Proprietorship to an LLC

What is a Sole Proprietorship and Limited Liability Company?

A sole proprietorship is the simplest and most common form of business ownership, where a single individual owns and operates the entire business. A sole proprietorship has no legal distinction between the owner and the business, meaning the owner is responsible for all the business’s debts, liabilities, and obligations. 

On the other hand, a Limited Liability Company (LLC) is a legal business structure that combines the limited liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership. This means the owners, known as members, are not personally responsible for the company’s debts and liabilities. The company’s profits and losses are reported on the members’ tax returns. We reviewed some of the Best LLC Services and provided features as an add-on with their packages for you to check out.

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Having a sole properietorship had given you freedom and comfortability, but, starting an LLC in Tennessee has a lot to offer, which is why it is a highly recommended business structure. It is suggested that you speak with a legal professional first before you begin coverting your sole proprietorship to an LLC. They will understand what’s best for you and your company.

– WEBINARCARE EDITORIAL TEAM

Steps on Converting Tennessee Sole Proprietorship to an LLC

To convert Tennessee sole proprietorship to an LLC, you must follow the guidelines that include choosing a name for your LLC, appointing a Registered Agent, preparing for the Articles of Organization, creating an Operating Agreement, obtaining an EIN, opening a business bank account, registering for state tax and licenses, and lastly, informing clients and vendors of conversation.

Step 1: Choose A Name For Your LLC

The first step in converting your sole proprietorship to an LLC is selecting a unique and distinguishable name for your new entity. In Tennessee, there are specific naming requirements and restrictions that you must adhere to when choosing your LLC’s name:

  • The name must include “Limited Liability Company,” “LLC,” or “LLC.“
  • The name cannot include words or phrases that imply the company is engaged in activities it is not authorized to conduct.
  • The name must be distinct from other registered businesses in Tennessee.

In Tennessee, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 4 months. You must file a name reservation application in the Tennessee Secretary of State to keep the name. 

You can register your business under a different legal name if your preferred name isn’t available. Once you have chosen a name, you can submit an application for a DBA (doing business as). In this manner, you can choose any name you desire for your business. A DBA allows a company to operate under the name of the person or entity who owns it. If you have decided to file for Tennessee DBA, you can file it in two methods, by mail, and in person. However, before filing a DBA, you should know that you need to renew your DBA for up to five years, which costs varies by county.

You can check the availability of your desired business name by searching the Tennessee Secretary of State Business Information Search‘s website.

Step 2: Appoint a Registered Agent

In Tennessee, all LLCs are required to appoint a Registered Agent. Registered Agent is a person or entity responsible for receiving and forwarding legal and tax documents on behalf of your Tennessee LLC, such as service of process, Tennessee Annual Report, and state tax notifications. Your Registered Agent must have a physical address in Tennessee and be available during regular business hours. In Tennessee, the cost of Registered Agent usually ranges from $50 – $150.

When selecting a Registered Agent, consider their reliability, knowledge of state requirements, and ability to manage sensitive legal documents. You can serve as your own Registered Agent, appoint another individual, or hire the Best Registered Agent Service.

Step 3: Prepare and File the Tennessee Articles of Organization

To officially form your Tennessee LLC, you must prepare and file Tennessee Articles of Organization with the Tennessee Secretary of State. The Articles of Organization is a legal document that outlines essential information about your  Tennessee LLC, including:

  • The LLC’s name
  • The Registered Agent’s name and address
  • The LLC’s purpose
  • The LLC’s duration (perpetual or for a specific term)
  • The names and addresses of the initial members or managers

In Tennessee, the filing fee for the Articles of Organization is $300. You can submit the document online through the Tennessee Secretary of State’s website or by mail. Processing times may vary, so check the website for current information.

Step 4: Create an Operating Agreement

Although not legally required, Tennessee Operating Agreement is a crucial document that outlines the structure, management, and financial arrangements of your Tennessee LLC. The operating agreement should include the following:

  • The roles and responsibilities of members and managers.
  • The process for admitting or removing members.
  • The allocation of profits and losses among members.
  • The procedure for making major decisions.
  • The process for dissolving the LLC.

Having a written Tennessee operating agreement can help prevent disputes and ensure a smooth operation of your LLC. It is advisable to work with Tennessee Business Attorney to draft an operating agreement that meets the specific needs of your business and complies with Tennessee laws.

Step 5: Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) in Tennessee, or Federal Tax Identification Number, is a unique nine-digit number issued by the Internal Revenue Service (IRS) to identify your business for tax purposes. With an EIN, you can open a business bank account, file tax returns, and hire employees.

To obtain an EIN for your Tennessee LLC, you can apply online on the IRS website, by mail, or by fax. The online application process is the fastest and most convenient method, as you will receive your EIN immediately upon completing the application. There is no fee to obtain an EIN.

The application of an EIN in Tennessee can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

Recommended: Professional services have the EIN included in their LLC formation package. We recommend using –

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Step 6: Opening of Tennessee Business Bank Account

When converting your sole proprietorship to an LLC, separating your personal and business finances is essential by opening a dedicated business bank account. Tennessee business bank account helps maintain limited liability protection and makes managing your business’s finances and taxes easier.

To open a business bank account in Tennessee, you will need the following documentation:

  • Your LLC’s Certificate of Formation
  • Your LLC’s EIN
  • Your LLC’s operating agreement (if applicable)
  • A resolution authorizing the opening of the account (if required by the bank)

You can check out the Best Banks in Tennessee, which offers the best fees, services, and convenience for your business needs.

Step 7: Register for Tennessee Taxes and Licenses

As an LLC in Tennessee, your business may be subject to various state taxes and licenses, depending on the nature of your operations. Common taxes and licenses include:

  • Sales Tax: If your LLC sells taxable goods or services, you must register for Tennessee sales tax permit and collect sales tax from your customers.
  • Employer Taxes: If your LLC has employees, you may be required to register for Tennessee unemployment insurance and workers’ compensation coverage.
  • Business License: Tennessee Business License is a legal document granted by a state government body that permits you to conduct business within the area under its jurisdiction. The price of business licenses and permits in Tennessee ranges from $50 – $300.

To ensure you comply with all applicable Tennessee tax and licensing requirements, you can check out the Tennessee Department of Revenue for more information.

Step 8: Inform Clients and Vendors of the Conversion

After converting your Tennessee sole proprietorship to an LLC, you must inform your clients, vendors, and other business contacts of the change. Update your contracts, invoices, and marketing materials with your new LLC name, and communicate the transition to ensure a smooth and professional process.

Ongoing Compliance For Tennessee LLCs

As an LLC in Tennessee, you are subject to ongoing compliance and reporting requirements, including:

  • Filing Annual Report with the Tennessee Secretary of State and pay the associated fee and which you can pay every 1 year.
  • Maintaining accurate and up-to-date records of your Tennessee LLC’s finances, meetings, and decisions. You can manage your finances using spreadsheets, accounting software, or becoming a CPA in Tennessee.
  • Adhering to any industry-specific licensing and regulatory requirements.

Benefits of Converting Tennessee Sole Proprietorship to an LLC

In converting Tennessee Sole Proprietorship, there are benefits that you should consider. Here are the benefits you must know before converting your sole proprietorship:

Limited Liability Protection

Converting a sole proprietorship to an LLC provides limited liability protection for the business owner. This means that the owner’s assets (such as their home or car) are separate from the business assets and are protected from being seized to pay off business debts or in case of a lawsuit.

Credibility and Professionalism

Tennessee LLC can help improve the credibility and professionalism of the business. Many customers and suppliers prefer dealing with an LLC, which shows commitment and stability.

Tax Flexibility

With Tennessee LLC, you can choose how your business will be taxed. It can be taxed as a sole proprietorship, a partnership, or a corporation. This allows you to choose the tax structure that best fits your business and may result in potential tax savings.

Easier Access to Funding

Tennessee LLC may have an easier time obtaining funding from banks and investors than a sole proprietorship. Many lenders and investors prefer to work with an LLC, as it demonstrates a commitment to the business and provides legal protection.

Ownership and Management Flexibility

Tennessee LLC allows you to have multiple owners (called members) and to divide ownership and management responsibilities among them. This can make growing your business easier or bring in new partners.

Enhanced Privacy

In some states, such as Tennessee, an LLC can offer more privacy than a sole proprietorship. This is because the business owner’s personal information may not be as public as it would be with a sole proprietorship.

Easier Transfer of Ownership

With Tennessee LLC, transferring business ownership to another person or entity is generally easier. This can be beneficial if you decide to sell your business, bring on new partners, or plan for succession.

Continuity of Existence

Unlike a sole proprietorship, which ceases to exist upon the death or incapacity of the owner, Tennessee LLC can continue to operate even if the owner passes away or becomes incapacitated. This provides stability and continuity for the business and its employees.

Compliance with Tennessee Requirements

Some states require certain types of businesses, such as those in the professional services industry, to operate as Tennessee LLC or another corporate entity. Converting your sole proprietorship to an LLC in Tennessee ensures that your business complies with these regulations and avoids potential legal issues.

Access to Additional Benefits

Tennessee LLC may be eligible for additional benefits, such as state-specific tax incentives or credits, not available to sole proprietorships. These benefits can help reduce your tax burden and support the growth of your business.

In summary, converting a sole proprietorship to an LLC in Tennessee can provide significant benefits, including limited liability protection, tax flexibility, increased credibility, and easier access to funding. It’s essential to carefully consider these advantages and consult with a legal or tax professional before deciding to convert your business structure.

FAQs

What are the benefits of converting my Tennessee sole proprietorship to an LLC?
Converting your sole proprietorship to an LLC can provide liability protection, tax flexibility, and credibility for your business.
What is required to convert a Tennessee sole proprietorship to an LLC?
You’ll need to file articles of organization with the Tennessee Secretary of State, update business licenses and permits, and get a new employer identification number (EIN) if necessary.
How long does it take to convert a sole proprietorship to an LLC in Tennessee?
The process can take several weeks, as you’ll need to receive approval from the Tennessee Secretary of State, update licenses and permits, and make other necessary changes.
Will I need a new business name when converting to an LLC in Tennessee?
You can use your existing business name, but you’ll need to add “LLC” or a similar identifier to the end of it.
How much does it cost to convert a sole proprietorship to an LLC in Tennessee?
The cost varies depending on the state filing fees, application fees for new licenses, and the assistance of any necessary legal or financial professionals.
Do I need to have a registered agent when converting to an LLC in Tennessee?
Yes, in Tennessee, you’ll need to appoint a registered agent who can receive legal notices and other official mail on behalf of your LLC.
Will I need to register for taxes when converting to an LLC in Tennessee?
You’ll likely need to update your tax registrations and receive new tax ID numbers or permits for your LLC in Tennessee.
Will transferring assets from the sole proprietorship to the LLC involve paying taxes in Tennessee?
You should consult with a tax professional to determine the tax implications of transferring assets from a sole proprietorship to an LLC in Tennessee.
Can I keep my business bank account when converting to an LLC in Tennessee?
You’ll need to inform your bank of the conversion, update your account information, and potentially open a new account for your LLC in Tennessee.
How many members are required for an LLC in Tennessee?
You can have as few as one member or multiple members for an LLC in Tennessee.
How often will I need to file annual reports with the Tennessee Secretary of State as an LLC?
LLCs in Tennessee are required to file an annual report each year by the first day of the fourth month after the end of the fiscal year.
Will converting from a sole proprietorship to an LLC affect my tax classification in Tennessee?
Depending on any changes to the ownership or operation of your business, you may need to re-evaluate your tax classification as an LLC in Tennessee.
Can I file the paperwork for converting a sole proprietorship to an LLC on my own in Tennessee?
You can file the necessary paperwork yourself with the Tennessee Secretary of State, but it’s recommended to seek legal guidance or assistance from a professional to ensure all requirements are met.
Do I need to draft an operating agreement when converting my Tennessee sole proprietorship to an LLC?
Although not mandatory, creating an operating agreement can establish your LLC’s internal structure and clarify roles and responsibilities among members.
Are foreign LLCs allowed to do business in Tennessee?
Yes, foreign LLCs can do business in Tennessee, but will need to register with the Tennessee Secretary of State and receive a certificate of registration to do so.
Are LLC members in Tennessee personally liable for business debts and obligations?
Generally, LLC members are not personally liable for business debts and obligations in Tennessee.
Will I need to notify my employees of the conversion to an LLC in Tennessee?
Yes, you’ll need to inform your employees of any changes in business structure or other relevant updates in Tennessee.
Can I convert my Tennessee sole proprietorship to an LLC while keeping the same tax ID number (EIN)?
Depending on the circumstances, you may need to obtain a new tax ID number (EIN) for your LLC in Tennessee.
Will converting to an LLC change my business name on state filings in Tennessee?
Yes, you’ll need to amend any prior state filings to reflect your new LLC name in Tennessee.
Will LLC members be required to pay self-employment taxes in Tennessee?
LLC members may be required to pay self-employment taxes on income earned through the LLC in Tennessee.
Can I change my mind and dissolve my LLC after converting from a sole proprietorship in Tennessee?
Yes, you can dissolve your LLC in Tennessee by filing articles of dissolution with the Secretary of State.
Will converting to an LLC affect my business’s licenses in Tennessee?
You’ll need to update your business licenses and ensure compliance with any new requirements for your newly formed LLC in Tennessee.
Should I consult with an attorney before converting my Tennessee sole proprietorship to an LLC?
It’s recommended to consult with an attorney or other legal professional before taking any steps to convert a sole proprietorship to an LLC in Tennessee.
Can I continue to operate my business during the conversion process to an LLC in Tennessee?
Yes, generally, you can continue operating your business while going through the conversion process to an LLC in Tennessee.
Can I convert to a different business structure besides an LLC in Tennessee?
Yes, you may choose to convert your sole proprietorship to a partnership, corporation, or other structure in Tennessee.
Are there additional taxes or fees I’ll need to pay while converting my Tennessee sole proprietorship to an LLC?
You may need to pay state filing fees, application fees for licenses and permits, and legal and financial advisory fees while converting a sole proprietorship to an LLC in Tennessee.
Will converting to an LLC require me to refile all documents with relevant government agencies in Tennessee?
You’ll need to update and refile existing documentation with state agencies, such as business registration, licenses, permits, and tax registrations when converting from a sole proprietorship to an LLC in Tennessee.
What are my options if the LLC form does not meet my needs in doing business activities in Tennessee?
If an LLC does not meet your needs in doing business activities in Tennessee, you have the option to choose from other business entity structures like corporation, partnership, or sole proprietorship. You must consult with a professional attorney or a financial advisor to determine what business entity suits you and your business plan the most effectively.
What are the benefits of converting a sole proprietorship to an LLC in Tennessee?
By converting to an LLC, you can limit your personal financial liability.
Is a Tennessee LLC subject to double taxation like corporations are?
No, Tennessee LLC’s are classified as pass-through entities and are not subjected to double taxation.
What steps need to be taken to convert a Tennessee sole proprietorship to an LLC?
You’ll need to register a new LLC with the state, obtain a federal tax ID number, and transfer your assets and liabilities.
Will my business name automatically convert to the LLC name once the conversion process is complete?
No, you’ll need to register your LLC name separately with the TN Secretary of State.
Can I be the only member of my LLC in Tennessee?
Yes, single-member LLC’s are permissible in Tennessee.
What are the annual reporting requirements for Tennessee LLCs?
You’ll need to file a report and pay a fee each year with the TN Secretary of State.
Will I need a new business license after converting my sole proprietorship to an LLC in Tennessee?
Yes, you’ll need to obtain a new business license in your LLC’s name.
Is an Operating Agreement required for Tennessee LLCs?
No, an Operating Agreement is not legally required in Tennessee, but it is highly recommended.
Can I continue to use the same business bank account after converting to an LLC in Tennessee?
No, you’ll need to open a new bank account in your LLC’s name.
Am I required to carry workers’ compensation insurance as the owner of a Tennessee LLC?
Yes, LLC owners who conduct work themselves are also required to carry workers’ compensation insurance.
Can the conversion process be completed online?
Yes, all necessary forms and registration can be completed online through the TN Secretary of State website.
What are the costs associated with converting to an LLC in Tennessee?
The filing fee is $300, plus any additional costs associated with changing licenses, permits, or tax IDs.
Can I convert a Tennessee LLC back to a sole proprietorship if necessary?
Yes, you can dissolve the LLC and revert back to a sole proprietorship structure at any time.
Who can act as a registered agent for my Tennessee LLC?
Anyone who is a resident of Tennessee or a business entity authorized to conduct business in Tennessee can act as a registered agent.
Will I need to obtain new sales tax IDs after transitioning to an LLC in TN?
Yes, you will need to obtain new IDs as an LLC structure is different from a sole proprietorship.
Should I consider hiring a business attorney for the conversion process?
While not required, it is highly recommended to ensure that the process is completed properly and minimize any potential issues that could arise.
Can I convert a Tennessee nonprofit to an LLC?
No, any organization that is organized as a different type than LLC will require dissolution and a new entity creation.
How does the liability protection of an LLC work in Tennessee?
Liability is primarily limited to the assets of the LLC, rather than the personal assets of the members or other owners.
Is there a maximum number of members that a Tennessee LLC can have?
No, there is no limit to the number of members that an LLC can have in Tennessee.
What taxes will my Tennessee LLC need to pay?
Tennessee LLC’s are subject to both state and federal income taxes.
Can I change my registered office address after my Tennesseu LLC has been formed?
Yes, you can change the office address for your LLC at any time through the TN Secretary of State website.
Can a Tennessee LLC be managed by its members?
Yes, members can choose to manage the LLC, or they can delegate management to a third party through an Operating Agreement.
Do I need to get a new EIN for my Tennessee LLC?
Yes, you’ll need to obtain a new EIN number for your LLC.
Is there a default management structure for Tennessee LLCs?
By default, Tennessee LLCs are member-managed, but the structure can be changed through an Operating Agreement.
Do I need a separate business license for each location of my Tennessee LLC?
Yes, each location will require its own business license.
Are Tennessee LLCs required to register with the state department of taxation or revenue?
Yes, LLCs are required to register with Tennessee state taxation department.
Can a foreign LLC convert to a Tennessee LLC?
Yes, a foreign LLC can register and convert to a Tennessee LLC through the TN Secretary of State’s office.
Is there a minimum capital requirement for Tennessee LLCs?
Tennessee LLC businesses are not required by state law to have any minimum amount of capital.

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Conclusion

Converting your Tennessee sole proprietorship to an LLC is a significant decision that can provide valuable benefits, such as limited liability protection, tax advantages, and enhanced credibility. Following the steps outlined in this guide and consulting with legal and financial professionals, you can successfully navigate the conversion process and position your business for future growth and success.

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