How to Choose the Right Corporate Structure for Your Tennessee Business
November 17, 2025
Choosing the right corporate structure for your Tennessee business is a strategic tax decision that shapes your company's future. The entity you select determines how much you'll owe in taxes, the level of personal liability you assume, and how easily your business can grow or bring on new partners. The tax implications of each structure can be complicated to navigate.
Thankfully, a Certified Public Accountant (CPA) can help you compare options, model long-term scenarios, and determine which structure best supports your goals.
In the sections that follow, we'll break down Tennessee's primary business structures and outline how to select the most tax-efficient option for your company.
How a CPA Helps You Choose the Right Business Structure in Tennessee
Choosing the proper business structure in Tennessee requires understanding how each option behaves under both federal and state tax law. A seasoned CPA evaluates your business through two lenses at once: the IRS rules that govern federal taxation and the Tennessee-specific rules that determine franchise, excise, and business tax obligations.
Many new owners are surprised to learn that Tennessee has no state income tax on wages, yet most entities (including pass-through structures) may still owe franchise and excise taxes. In other words, "pass-through" doesn't always mean "no state taxes," and the way income flows can differ significantly at the state level. This mismatch is a common reason businesses unintentionally overpay.
CPAs model different structures side-by-side, forecast long-term outcomes as revenue grows, and ensure you remain fully compliant with the Tennessee Department of Revenue.
1. Evaluate Federal Rules
CPA reviews IRS treatment for each structure.
2. Analyze TN Franchise & Excise
Identifies state-level obligations often overlooked.
3. Model Long-Term Scenarios
Projects tax burden as revenue and payroll grow.
4. Recommend Optimal Structure
Aligns tax savings with liability and growth goals.
Overview of Tennessee's Main Business Structures
Tennessee business owners typically choose from four primary entity types: sole proprietorships, partnerships, corporations, and LLCs.
Sole Proprietorship
A sole proprietorship is the simplest option. It's easy to form, easy to operate, and taxed directly on the owner's personal return. The downside is that there's no liability protection. Your personal assets are exposed if issues arise.
Partnerships
Partnerships are a common structure for small businesses. Two or more people or entities share profits, losses, and responsibilities. Partners are taxed on their share of the profits and generally handle their own self-employment taxes. Partnerships offer flexible management and help limit each partner's liability.
Limited Liability Partnerships (LLPs)
An LLP provides partners with protection from personal liability for one another's actions. LLPs are pass-through structures, so profits and losses flow to the partners' individual returns. They offer flexibility, allow partners to specialize, and often appeal to investors due to the liability protections in place.
Professional Corporations
A professional corporation allows licensed professionals, such as lawyers, doctors, or architects, to operate as a corporation. It offers limited liability, tax advantages, and credibility. Professional corporations pay corporate income tax, and profits can be distributed as dividends, which may be taxed at a lower rate.
Standard Corporations
A standard corporation is a separate legal entity responsible for its own profits, losses, and taxes. The corporation pays taxes on its income, and shareholders pay taxes on dividends they receive. Corporations can take deductions, issue stock, and transfer ownership interests, but they are responsible for corporate-level taxes.
Benefit Corporations
Benefit corporations are designed to pursue both profit and social impact. They must consider social and environmental factors in their decisions and report on performance to stakeholders. Their charters can explicitly include a social purpose, making them appealing to mission-driven companies.
Limited Liability Companies (LLCs)
LLCs combine flexible tax treatment, liability protection, and fewer formalities than corporations. Although LLC rules exist nationally, Tennessee's tax system affects how advantageous the structure may be.
Tax Implications of Common Tennessee Business Structures
Tax considerations in Tennessee extend beyond federal rules. Understanding those differences is key.
Tax Implications for Sole Proprietorships and Partnerships
Sole proprietorships and partnerships use pass-through taxation at the federal level, but Tennessee's rules vary. While the state doesn't tax personal income, certain business activities may trigger state business tax, sales tax, or even franchise and excise taxes. Combined with the fact that owners are personally liable for business debts, tax exposure, and legal exposure often overlap.
Tax Implications for LLCs
LLCs are popular because they offer liability protection and flexible tax options. By default, an LLC is a pass-through entity, but owners can elect S-Corp taxation to reduce payroll taxes or choose C-Corp treatment if profits will be reinvested. Tennessee, however, may still impose franchise and excise taxes regardless of federal classification. A CPA determines whether an S-Corp election or default LLC taxation produces the greatest savings.
Tax Implications for Corporations
Corporations have their own tax dynamics. A traditional C-Corporation is subject to Tennessee's franchise and excise taxes and may face double taxation federally. Still, it can be a strong fit for companies planning to raise capital or scale.
S-Corporations avoid federal corporate tax by passing income to shareholders, but may still owe state-level taxes. Both structures require more administrative maintenance, such as board meetings, minutes, and filings, which increases compliance costs.
Sole Proprietorship
- Simple setup
- Pass-through taxation
- No liability protection
Partnership / LLP
- Shared ownership
- Pass-through taxation
- Liability protection varies
LLC
- Flexible tax options
- Strong liability protection
- May owe TN franchise & excise
C-Corp / S-Corp
- Scales well for growth
- More formal requirements
- State-level taxes still apply
How to Choose the Most Tax-Efficient Structure for Your Tennessee Business
Choosing the most tax-efficient structure starts with a clear assessment of your needs.
- Begin with liability risk. If protecting personal assets is a priority, an LLC or corporation may be the right fit.
- Project your revenue. Higher earnings may support an S-Corp election to reduce payroll taxes. Businesses reinvesting profits may benefit from a C-Corp structure.
- Consider multi-state operations. Expanding beyond Tennessee can create tax nexus in other states, making the selection of the proper structure more critical. If you're raising capital, a corporation may be the strongest choice.
- Evaluate your administrative tolerance. Corporations require more formality than LLCs.
A CPA ties all this together by running detailed tax-modeling scenarios so you can compare outcomes and choose the structure that maximizes savings and long-term stability for your business. White Olive CPA in Franklin TN can
help with tax services!
Get Expert Guidance on Choosing a Tennessee Business Structure
Choosing the right structure is too important to leave to guesswork. White Olive CPA brings deep Tennessee tax knowledge and can help you determine whether your current structure is supporting or limiting your financial goals.
Our experienced professionals can help you design an optimal structure that protects your profits and minimizes tax exposure. Contact White Olive CPA today to get expert advice tailored to your business.
