Tennessee LLC vs Sole Proprietorship

A sole proprietorship costs nothing to start but provides zero liability protection and still owes the same federal taxes. A Tennessee LLC costs $300 minimum but creates a legal barrier protecting personal assets. For formation, see how to form a Tennessee LLC.

The Tennessee Cost-Benefit

Tennessee LLC annual minimum: $600/year ($300 report + $300 F&E tax) Sole proprietorship: $0/year in state fees

But: One lawsuit can cost $10,000-$100,000+. The $600/year is liability insurance.

Tax Treatment

Both sole proprietorships and single-member LLCs pay the same federal taxes. However, Tennessee LLCs owe the F&E tax ($300 minimum) that sole proprietors may avoid. This makes the decision more nuanced in Tennessee than in cheaper states.

When LLC Is Worth It

• Any business with clients, contracts, or physical liability exposure
• Income above $20,000+
• Any business with assets worth protecting

When Sole Proprietorship Might Be Acceptable

• Very low income (under $10,000) where $600/year is a significant percentage
• Zero liability exposure (extremely rare)
• Testing a business idea briefly before committing

FAQ

Is the $300 F&E tax really mandatory?

Yes. All Tennessee LLCs owe at least $300 in F&E tax annually, even with zero income. This is the cost of operating as an entity in Tennessee.