As we discussed before, most people end up operating their business through an entity of some sort. However, there are some individuals who do not necessarily need an entity and can operate their business as a sole proprietorship.
Without going into details concerning the various types of business entities, it is important to remember that a sole proprietor is personally responsible for the debts and obligations of the business (i.e. there is no “shield” or “veil” of limited liability as in a corporation or LLC).
While this may sound scary, it is actually not that big of a deal for some people–and the good news is that sole proprietors do not have to pay Tennessee Franchise & Excise taxes (which are typically between 6%-7%).
We will discuss a bit more concerning the various factors that you should consider when trying to decide whether to create an entity through which to operate your business:
#1: The kind of service or product you are providing. If you’re providing a risky service or product, that is an argument in favor of having an entity for your business. There is a huge difference between someone who is manufacturing tires and someone who is taking photographs of people. While photography may entail certain risks (risks particularly related to personal identity, images and/or other intellectual property rights), those risks are inherently less risky than the tire manufacturer scenario.
Keep in mind that there are many other factors to consider in addition to the type of service or product you are providing, and we will discuss those in more detail later. However, for now, explore whether the level of risk your business entails may be curtailed by purchasing an insurance policy to adequately cover those risks.
There are many types of businesses that can cover their risks adequately (and in a way that agrees with the business-owner’s risk tolerance) by purchasing general liability and other insurance policies to cover things like services which cause or are alleged to have caused bodily injury or property damage.
If your risks may be covered by insurance policies which are less costly than the TN F&E taxes, it may be a better idea to stay a sole proprietorship and avoid the TN F&E taxes.
This is a very brief and general discussion of a rather important topic, so we strongly recommend that you discuss your business with an insurance broker and an attorney so that you can fully understand how best to curtail the risks associated with your business.