Converting Sole Proprietorship to LLC 2024: Tennessee Conversion Guide

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How to Convert Sole Proprietorship to LLC in Tennessee

If you’re thinking of converting your sole proprietorship to an LLC in Tennessee, you’re making a smart move to protect your personal assets and boost your business’s credibility. At LLCBase, we’ll help you through this process by providing essential information and outlining the necessary steps for establishing a Tennessee LLC.

By starting an LLC in Tennessee, also known as The Volunteer State, you’ll enjoy several benefits, including tax flexibility, limited liability protection, and a more professional image. Our comprehensive guide will equip you with the knowledge to successfully convert your sole proprietorship to an LLC in Tennessee, setting your business on a path to greater success and security.

What is a Sole Proprietorship and a Limited Liability Company?

A sole proprietorship is a business structure in which a single individual owns and operates the business. The owner is solely responsible for all decision-making, profits, and liabilities associated with the business. There is no legal distinction between the owner and the business, making the owner personally liable for any debts or legal issues the business may encounter. This business structure is the simplest and least expensive, as it typically requires minimal paperwork and regulatory compliance.

An LLC, or Limited Liability Company, combines a corporation’s limited liability protection with the operational flexibility of a partnership or sole proprietorship. In an LLC, the business owner, known as a member, has personal liability protection, meaning their personal assets are not at risk in case of the business’s debts or legal issues. LLCs also have flexible tax options, as they can be taxed as a pass-through entity (like a sole proprietorship) or a corporation. This type of business structure is more complex and involves a higher degree of compliance than a sole proprietorship but offers greater legal protection and flexibility for the owner(s).

One of the reasons LLCs are popular in Tennessee is their tax flexibility. LLCs are typically taxed as pass-through entities, meaning the profits and losses flow directly to the member’s personal income tax returns, avoiding the double taxation that corporations face. An LLC in Tennessee has fewer strict administrative requirements, allowing simpler management and decision-making processes.

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Differences Between Sole Proprietorship and LLC

A sole proprietorship is the simplest form of business structure, making it an attractive option for many small business owners. It’s easy to set up and manage since there is no legal distinction between the owner and the business. However, this lack of separation also means the owner has no personal liability protection. In a sole proprietorship, if the business faces financial trouble or legal claims, the owner’s personal assets, such as their home or savings, may be at risk to cover the debts and liabilities.

On the other hand, an LLC, or Limited Liability Company, is a separate legal entity that provides limited liability protection to its owners, known as members. This means that the member’s personal assets are protected from the company’s debts and liabilities, as the business is considered a distinct entity from its owners. This protection is particularly beneficial in lawsuits, bankruptcy, or other financial challenges.

Another significant difference between a sole proprietorship and an LLC in Tennessee is an LLC’s tax flexibility. While a sole proprietorship’s income is reported directly on the owner’s personal tax return and subject to self-employment taxes, an LLC can be taxed as a sole proprietorship, partnership, or corporation. This flexibility allows LLC owners to select the most advantageous tax structure for their specific situation, potentially resulting in tax savings and a more manageable tax burden.

In addition, starting a business in Tennessee may also provide a more professional and credible image to clients, customers, and potential investors compared to a sole proprietorship. This enhanced reputation can attract new business opportunities and contribute to the overall growth and success of the company.

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6 Steps to Convert Sole Proprietorship to LLC

Are you a sole proprietor looking to level up your business structure? Our straightforward 6-step guide will walk you through converting your sole proprietorship to an LLC, providing enhanced liability protection, potential tax benefits, and a more professional image for your growing enterprise.

Step 1: Confirm the Business Name

Before changing your sole proprietorship to a Tennessee LLC, you must check if your desired business name is available in Tennessee. You can do this by using the Tennessee Secretary of State Business Information Search to search the Tennessee’s official database for existing business names. If the name is available, you can reserve it for 4 months by paying the $20 for online reservations or the $20 for mail reservations. This ensures that no one else can register the same name while you complete the LLC formation process.

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Step 2: File Articles of Organization

Next, you’ll need to file the Articles of Organization with the Tennessee Secretary of State. This legal document officially forms your LLC in Tennessee and includes information such as the name of your LLC, the registered agent’s contact information, and the LLC’s purpose.

You can file the Articles of Organization either online or by mail, using the Create an account/Log in to the SOS site, get the e-form, fill it, and submit online. Or get the online PDF, fill it up and upload it back on the site. for online filing or the Send the form by mail to or drop it off in person at Corporate Filings, 312 Rosa L. Parks Avenue, 6th Floor, William R. Snodgrass Tower, Nashville, Tennessee 37243 for mail filing. The $100 for online and by mail filing must be paid when submitting your documents. When starting an LLC, we recommend hiring one of the best LLC formation services in Tennessee to help you!

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Step 3: Execute an LLC Operating Agreement

Although not legally required in every state, creating an LLC operating agreement is highly recommended. This document outlines the ownership structure, management roles, and operating procedures for your Tennessee LLC. It helps establish the rules and expectations for business operations, which can prevent misunderstandings and disputes among owners. An operating agreement should cover profit and loss allocation, voting rights, management structure, and procedures for adding or removing members.

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Step 4: File Form SS-4 to Obtain an EIN

An Employer Identification Number (EIN) is required for your LLC in Tennessee. You can apply for an EIN by filing Form SS-4 with the Internal Revenue Service (IRS). This nine-digit number is used for tax reporting, employee payroll, and other business-related activities. Obtaining an EIN is crucial for maintaining the separate legal identity of your LLC and ensuring proper tax compliance.

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Step 5: Apply for a New Bank Account

Once your Tennessee LLC is formed, you must open a separate bank account for your business. This is essential for maintaining the limited liability protection offered by your LLC, as it helps separate your personal finances from those of your business. Mixing personal and business finances can jeopardize the legal protection provided by an LLC, so it’s crucial to establish a dedicated bank account for your company.

Step 6: Apply for Business Licenses and Permits

Depending on the nature of your business, you may need to apply for Tennessee business licenses and permits to operate legally in Tennessee. These requirements vary by industry, location, and products or services. You can contact the Tennessee Secretary of State to inquire about the specific requirements for your industry. Examples of licenses and permits may include professional licenses, zoning permits, sales tax permits, and health department permits. Ensuring your business fully complies with all relevant regulations is essential for your LLC’s smooth operation and ongoing success in Tennessee.

We’ve also compiled a list of the best business attorneys in Tennessee to assist you in acquiring your business licenses, securing permits, and other Tennessee requirements!

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Cost of Changing From Sole Proprietorship to LLC

The cost of changing from a sole proprietorship to an LLC in Tennessee includes the following fees:

  • $300 for filing the Articles of Organization
  • $50 per member for the annual report filing (every 1 year years)
  • Tennessee Department of Revenue fees, which may include state income tax at 6.50% and state sales tax at 7.00%
  • $100 minimum annual franchise tax fee (if applicable)
  • 5% of tax due per month, up to 25% annual franchise tax late filing fee (if applicable)
  • Business license and permit fees, which vary depending on the type of business and the location

Why Change From Sole Proprietorship to LLC

There are several reasons why business owners choose to change from a sole proprietorship to an LLC in Tennessee:

  • Personal asset protection: One of the primary reasons for converting a sole proprietorship to an LLC in Tennessee is the added layer of personal asset protection. As an LLC is considered a separate legal entity, the owner’s personal assets, such as their homes, cars, and savings, are protected from the company’s debts and liabilities. In contrast, a sole proprietor’s personal assets are at risk if the business faces financial or legal challenges. Thus, forming an LLC provides a safety net for business owners, ensuring that their personal finances are not jeopardized by their business dealings.
  • Tax benefits: Another advantage of converting to an LLC in Tennessee is the potential tax benefits. An LLC offers flexible tax options, allowing the business to be taxed as a sole proprietorship, partnership, or corporation, depending on the most beneficial structure for the owner’s specific circumstances. For example, an LLC can avoid the double taxation that corporations often face by being taxed as a pass-through entity, where the business’s profits and losses directly flow through to the owner’s personal tax return. This flexibility can lower the owner’s overall tax burden and provide additional tax planning and savings opportunities.
  • Improved credibility: Forming an LLC in Tennessee can also enhance the credibility and professional image of the business. Clients, customers, and potential investors may view an LLC as more stable and established than a sole proprietorship. This improved perception can help attract new business, secure funding, and enhance the company’s overall reputation. Additionally, having an LLC in Tennessee may provide more opportunities for growth and expansion, as the legal structure can be more easily adapted to accommodate new partners, investors, or business ventures.

FAQs

What are the advantages of converting a sole proprietorship to an LLC in Tennessee?
Converting a sole proprietorship to an LLC in Tennessee can protect personal assets, limit the owner’s personal liability for business debts, and provide more tax flexibility.
What steps are required to convert a sole proprietorship to an LLC in Tennessee?
The owner of the sole proprietorship needs to file Articles of Organization with the Tennessee Secretary of State, pay a filing fee, obtain necessary licenses and permits, and potentially dissolve the sole proprietorship.
Do I need to register my LLC with the state of Tennessee?
Yes, you need to file the Articles of Organization with the Tennessee Secretary of State in order to form an LLC.
Can I convert a sole proprietorship to a Tennessee LLC online?
Yes, you can file the Articles of Organization online with the Tennessee Secretary of State’s website.
Do I need a lawyer to convert a sole proprietorship to an LLC in Tennessee?
No, it is not required, but it may be helpful to consult with a lawyer to ensure that the process is completed correctly.
What is the difference between an LLC and a sole proprietorship in Tennessee?
An LLC is a separate legal entity from its owner and provides limited liability for the actions of the business, while a sole proprietorship is not a separate legal entity and does not offer limited liability protection.
Can I still run my business the same way after converting to an LLC in Tennessee?
Yes, for the most part. The daily operation of the business should remain largely the same, but there may be new formalities and legal requirements to fulfill.
Do I need to notify my customers or clients of the change to an LLC in Tennessee?
It’s not necessary, but you may want to inform them of the transition to a new entity.
Will I still need to pay self-employment taxes as an LLC in Tennessee?
Yes, members of an LLC are considered self-employed and need to pay self-employment taxes.
Are there any taxes or fees I need to pay after converting to an LLC in Tennessee?
Depending on the county in which your business is located, you may have to pay an annual business license or permit fee.
Can a Tennessee sole proprietorship with employees be converted to an LLC?
Yes, in fact if you have employees, converting to an LLC may provide additional tax and liability advantages.
Do I need to get a new business license after converting to an LLC in Tennessee?
Sometimes, it depends on the regulations in your county. It’s best to check with local government agencies to be sure.
Can I convert my Tennessee LLC back to a sole proprietorship in the future?
Yes, you can dissolve your LLC and return to a sole proprietorship if you choose to.
What happens to my business name after converting to an LLC in Tennessee?
You can retain the same business name by amending it on the Articles of Organization or register a new name with the Tennessee Secretary of State if you wish.
Do I need to file an operating agreement when converting to an LLC in Tennessee?
Tennessee doesn’t require LLCs to file operating agreements, but it’s still a good idea to have one in place.
Can a single member LLC operate in Tennessee?
Yes, Tennessee allows single-member LLCs.
Do I need to get new tax ID numbers after converting to an LLC in Tennessee?
No, as long as the sole proprietorship had a tax ID number, that number can still be used for the LLC.
How will my business be taxed after converting to an LLC in Tennessee?
The IRS considers LLCs as pass-through entities, which means the income or losses from the business flow through to the owner’s personal tax return.
Can a foreign entity convert to an LLC in Tennessee?
Yes, foreign entities can convert to Tennessee LLCs.
Can I have a registered agent who isn’t located in Tennessee?
No, the registered agent for a Tennessee LLC must be located in Tennessee.
Will the conversion to an LLC affect my business insurance policies in Tennessee?
You may need to update your business insurance policies to reflect the new entity type, so it’s crucial to consult with your insurance agent for any necessary changes.
Can I convert a Tennessee non-profit to an LLC?
Yes, a Tennessee non-profit can file for an LLC structure.
Are there any restrictions on LLCs in Tennessee?
Tennessee has minimal restrictions on LLCs, but it’s best to consult a lawyer or accountant to ensure that all legal requirements are met.
Can I conduct business in other states as a Tennessee LLC?
Yes, but you might have to create a foreign LLC in each state where you do business.
How can I find more resources for converting to an LLC in Tennessee?
The Tennessee Secretary of State website provides helpful information and resources for creating an LLC, in addition, finding a legal expert for consultation would also have a huge impact.
What is a sole proprietorship in Tennessee?
A sole proprietorship is a business that is owned and operated by one individual in Tennessee.
What is an LLC in Tennessee?
Limited liability companies (LLCs) are a legal entity that separates the personal liability of the owners from the company’s financial obligations in Tennessee.
Why would someone want to convert their sole proprietorship to an LLC in Tennessee?
Converting to an LLC can provide personal liability protection, tax advantages, and potential for increased growth and investment.
Do I need to file any paperwork in Tennessee to convert my sole proprietorship to an LLC?
Yes, you will need to file Articles of Organization of an LLC with the Tennessee Secretary of State’s Office.
How much does it cost to convert my sole proprietorship to an LLC in Tennessee?
The cost to file the Articles of Organization is $300 for a domestic LLC and $750 for a foreign LLC in Tennessee.
Can I keep the same name for my Tennessee business when converting to an LLC?
Yes, your business can keep the same name, or you can choose a new name.
Is there a waiting period to convert a sole proprietorship to an LLC in Tennessee?
No, Tennessee does not have a waiting period for converting a sole proprietorship to an LLC.
Can I convert to an LLC and keep the same EIN in Tennessee?
In most cases, you can keep the same EIN when converting to an LLC in Tennessee.
What is a Foreign LLC in Tennessee?
A foreign LLC is a business that was formed in another state but intends to do business in Tennessee.
What are the benefits of forming a Foreign LLC in Tennessee?
There are several benefits of forming a foreign LLC in Tennessee, including tax advantages and liability protection.
Is there a fee for registering a Foreign LLC in Tennessee?
Yes, the fee for registering a foreign LLC in Tennessee is $750.
Can I change my LLC’s operating agreement when converting my sole proprietorship to it in Tennessee?
Yes, you can change your LLC’s operating agreement to match your business needs in Tennessee.
How do I dissolve my sole proprietorship in Tennessee?
You will need to file a Dissolution Form PROTECTION OF A TITLE PENDING DESSLVEs with the Tennessee Secretary of State’s Office.
Do I need to cancel any permits or licenses when converting to an LLC in Tennessee?
Yes, you will need to cancel any permits or licenses associated with your sole proprietorship in Tennessee and reapply for them under your LLC.
Do I need to get a new EIN when converting a sole proprietorship to an LLC in Tennessee?
If you were formerly operating your business using your personal social security number, you will need to apply for a new employer identification number (EIN).
What is a Tennessee LLC’s Annual Report?
An Annual Report is a document that must be filed every year with the Tennessee Secretary of State’s Office to maintain your LLC’s active status.
How much does it cost to file an LLC’s Annual Report in Tennessee?
The fee to file an Annual Report for an LLC in Tennessee is $300.
Is there a deadline to file an LLC’s Annual Report in Tennessee?
Yes, LLC Annual Reports are due by April 1st of each year in Tennessee.
What are the voting rights of members in Tennessee LLCs?
The voting rights of members in Tennessee LLCs are typically based on the percentage of ownership in the company.
How many managers are required for an LLC in Tennessee?
Tennessee does not require LLCs to have managers.
Can I file for a Tennessee LLC online?
Yes, business owners can file Forms online.
How long does it take to process a Tennessee LLC formation?
Typically, it takes around 7-14 business days.
Are there any business activity restrictions or limitations when converting to an LLC in Tennessee?
No, in Tennessee, there are no business activity restrictions or limitations when converting to an LLC.
Can I still operate my business during the conversion process from a sole proprietorship to an LLC in Tennessee?
Yes, however, you must notify any clients, suppliers, and bank of the change in business structure.
Can my Tennessee LLC have multiple owners?
Yes, LLCs in Tennessee may have multiple owners known as “members.”
Can a Tennessee LLC be taxed as an S Corporation?
Yes, with Form 2553; Corporations can the choose to be taxed as an S corporation.
What personal liabilities will be protected by the LLC Vehicle in Tennessee?
Only business and operational liabilities will be protected by the LLC Vehicle in Tennessee.
Can I convert to Tennessee PLLC/Professional LLC from Sole Proprietorship?
Yes, a sole proprietorship can convert to a Professional Limited Liability Company (PLLC) by submitting the appropriate filings in Tennessee.
Can a single individual start a corporation legally in Tennessee?
Yes, an individual in Tennessee can start a corporation alone; these are called corporations for a single owner.

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Conclusion

Converting your sole proprietorship to an LLC in Tennessee offers numerous advantages, including personal asset protection, tax benefits, and improved credibility. By following the six steps outlined in this guide, you can confidently navigate the process of forming an LLC and enjoy its benefits to your business. Remember, investing in the right legal structure can provide long-term benefits and peace of mind as you grow and expand your business.

If you’re ready to take the next step and change your sole proprietorship to an LLC in Tennessee, visit LLCBase for more detailed information and guidance. Don’t wait any longer – start your journey toward a more secure and prosperous business today!

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