Category: Small Business

• What is a Limited Liability Company?

  

  The limited liability company (LLC) is a fairly new innovation in business law. For centuries, corporations served as the primary legal structure for businesses seeking limited liability protection. While corporations offer important protections for business owners, they also come with rigid formalities and complex rules. In response, innovative state legislators created the limited liability company.…

  

  The limited liability company (LLC) is a fairly new innovation in business law. For centuries, corporations served as the primary legal structure for businesses seeking limited liability protection. While corporations offer important protections for business owners, they also come with rigid formalities and complex rules.

  In response, innovative state legislators created the limited liability company. The idea was to give entrepreneurs and small business owners a simpler, more flexible alternative to corporate rigidity. We now have a highly versatile business entity that offers the best of both the corporate and sole proprietorship/partnership worlds.

  Let’s explore how the LLC came to be and the way it works compared to other types of business entities.

  The Rise of the LLC and Tennessee’s Adoption

  The LLC originated in Wyoming in 1977. It was inspired in part by European business forms like the German GmbH. The goal was to combine the liability protection of a corporation with the tax and management flexibility of a sole proprietorship or partnership.

  Tennessee first adopted its Limited Liability Company Act in 1994. The original Act offered a more accessible way for small business owners to operate while still protecting their personal assets.

  In 2006, the General Assembly passed the Revised Limited Liability Company Act. The Revised Act improved upon the original Act by clarifying governance rules, enhancing member protections, and broadening structural flexibility.

  Both sets of LLC law still exist alongside each other. But for entities formed after 2006, the Revised Limited Liability Company Act is generally what governs.

  Some states, including Tennessee, allow for formation of the PLLC—professional limited liability company. This type of entity is a common choice for lawyers, doctors, architects, CPAs, and similar professionals.

  The LLC Combines Aspects of Other Types of Business Entities

  

  An LLC blends features of several other types of business entities that have existed for many years.

  Corporation and LLC

  Unlike a corporation, an LLC is easier to manage. Corporations require regular meetings, bylaws, a board of directors, and detailed corporate formalities. Corporate entities must follow the legal requirements for operation and cannot create a shareholder agreement that contradicts the law.

  A limited liability company, on the other hand, can have member (owner) management, or management by hired managers. An operating agreement typically sets forth internal governance rules. Oftentimes, the operating agreement can have different rules than the default rules in the Revised LLC Act. There’s also no need for a board of directors or formal meetings.

  Corporations and LLCs both have ownership units. For corporations, it’s shares of stock. For LLCs, it’s a membership interest, usually expressed as a percentage. These ownership units can be transferred to another person fairly easily.

  Sole Proprietorship and LLC

  Compared to a sole proprietorship, a limited liability company provides a legal separation between the business and its owner. A sole proprietor is personally liable for business debts and lawsuits. There is no distinction between the business and its owner. When the owner dies, the business also ceases to exist.  

  But an LLC limits that personal liability by creating a legal separation. Creditors can only go after the company’s assets, not the owner’s home, car, or personal accounts (assuming proper operation). This allows entrepreneurs to still take some risks with their enterprises without risking everything.

  The LLC also continues to exist when a member dies. A member may also transfer the membership interest to a beneficiary as part of the member’s estate plan. Because ownership in the business is divided into measurable units, this enables easier transfer of the business’s ownership to another person or entity.

  Partnership and LLC

  A partnership historically left the partners personally liable for the partnership’s obligations. Though this rule has been modified over the years to allow for greater distinction between the partners individually and the partnership as an entity.

  But a limited liability company provides clear limited liability protection for all members. Like a partnership, LLCs can be taxed as pass-through entities. This allows for simpler tax reporting and avoiding double taxation that corporations often deal with.

  An LLC with multiple members typically should have an operating agreement, just as a partnership should have a partnership agreement. This will detail important things like ownership interests, management powers, and buy-sell provisions upon death.

  Tax Treatment of a Limited Liability Company

  

  A single-member LLC is a disregarded entity for federal income tax purposes by default. This means that income and expenses go directly to the member’s personal return on a Schedule C.

  Federal tax law treats a multi-member LLC as a partnership under Subchapter K. The LLC files a partnership tax return and will issue the members a K-1 form for their share of profits and losses.

  The great news is that a limited liability company isn’t stuck with these default tax treatments. It may choose one of the following tax classifications:

  • S Corporation status by filing IRS Form 2553 (commonly used to avoid self-employment tax on a portion of income);
  • C Corporation status by filing IRS Form 8832; or
  • Remaining taxed as a sole proprietorship (single member) or partnership (multi-member).

  This flexibility allows business owners to choose a structure that aligns with their business strategy and tax planning goals. And the tax classification generally doesn’t affect the flexibility of the limited liability company’s operations.

  Maintaining Limited Liability Protection

  While an LLC provides liability protection, that shield can be lost if the business doesn’t observe a few basic legal formalities. To preserve limited liability:

  • Keep business and personal finances separate so that bank accounts, credit cards, etc. are in the LLC’s name and used only for business purposes;
  • Sign contracts and legal documents in the name of the LLC, not in the member’s personal name;
  • Maintain proper documentation, such as an operating agreement and member resolutions for major decisions; and
  • Avoid using the LLC for personal expenses, instead being paid for services rendered or taking owner distributions.

  In Tennessee, the courts look closely at whether the LLC operates as a legal entity that is truly separate from the members as individuals. If it does not, members may find themselves personally liable for the business’s obligations, including lawsuits.

  Isn’t a Corporation Better for Liability Protection?

  

  A common misconception is that a corporation provides stronger liability protection than a limited liability company. Both structures limit personal liability for business matters, also known as the “corporate veil.” But an LLC offers more robust safeguards.

  In Tennessee, if a creditor obtains a judgment against an LLC member personally, the sole remedy is what’s called a “charging order.” This order entitles the creditor to receive the member’s financial distributions. But the charging order does not grant any control over the LLC’s operations or access to its assets.

  On the other hand, creditors of a corporation’s shareholders can potentially seize the shares in the company with a judgment. The creditor would then have voting rights and a say in the company’s management.​

  Moreover, Tennessee LLCs benefit from express statutory provisions that minimize the risk of piercing the corporate veil. State law explicitly states that failure to observe formalities on its own isn’t a ground for imposing personal liability on LLC members. The statute on this subject reads as follows:

  The failure of a domestic or foreign LLC to observe the usual entity formalities or requirements relating to the exercise of its powers or management of its business is not a ground for imposing personal liability on the members, holders, managers, directors, officers, employees or other agents of the domestic or foreign LLC. – Tenn. Code Ann. § 48-249-114(e).

  Corporations are more susceptible to veil-piercing claims if they neglect corporate formalities, like holding regular meetings or maintaining detailed records. There isn’t a statute offering a relaxed standard for corporate formalities.

  The good news is that piercing the veil is still a difficult thing to do in most situations. It’s good practice to maintain formalities regardless of whether you own a corporation or an LLC.

  When to Form an LLC vs. a Corporation

  A limited liability company can be a great choice for:

  • Small business owners looking for liability protection without excessive legal compliance;
  • Real estate investors seeking asset protection and tax flexibility;
  • Family-owned businesses or professionals who want a simple structure with contractual freedom; and
  • Entrepreneurs planning to grow and take on partners, but not necessarily seek outside investors.

  But a corporation may be more appropriate for those who:

  • Plan to raise capital through venture funding or public offerings;
  • Intend to reinvest most profits in the business (to take advantage of lower corporate tax rates); or
  • Operate in industries where regulators or investors prefer the corporate form.

  A corporation with a Subchapter S election may be useful for service businesses or owner-operators who want to minimize self-employment taxes. But these business owners need to be comfortable with some fairly strict eligibility rules.

  Final Thoughts on the Limited Liability Company

  The development of the limited liability company has been a boon to small business in the United States. With a fairly simple filing process, flexible management, and multiple tax classification options, entrepreneurs can have a business entity that has legitimacy without risking their personal assets.

  But small business owners still need to adhere to good practices with their LLC. Otherwise, the members may lose the limited liability protection. We discuss the risks of commingling personal and business finances in this article here.

  Connell Law, PLLC assists small business owners with formation, contracts, and general legal consulting. To start your Tennessee small business right from the start, request a free consultation with us today.  

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• Corporate Transparency Act Blocked by Federal Court

  

  On March 1, a federal judge in the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional. The Act, passed in 2021, would require nearly all small business owners to file a Beneficial Ownership Information Report with the Financial Crimes Enforcement Network. But with the ruling, this controversial requirement is on hold.…

  

  On March 1, a federal judge in the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional. The Act, passed in 2021, would require nearly all small business owners to file a Beneficial Ownership Information Report with the Financial Crimes Enforcement Network.

  But with the ruling, this controversial requirement is on hold. Over 32 million small business owners can breathe a sigh of relief, for now.

  What is the Corporate Transparency Act?

  The purpose of the Corporate Transparency Act is reportedly to help the federal government fight financial crimes and promote national security. The idea is that by knowing who has created small businesses like LLCs and S-Corporations, it can help law enforcement stop activities like money laundering and financing of terrorism.

  The Act began to take effect on January 1, 2024. Most small businesses are required to file a Beneficial Owner Information Report with the FinCEN. The report asks for information such as who the members of an LLC are, who managing or controlling corporate officers are, etc.

  Businesses formed prior to January 1, 2024 have until January 1. 2025 to file their reports. Business formed in 2024 have 90 days from the date of formation to do so. After January 1, 2025, businesses will have just 30 days to file.

  Failure to can subject business owners to hefty civil and criminal penalties.

  Why Was the Act Ruled Unconstitutional?

  

  An association of small business owners filed a lawsuit against the Secretary of the Treasury. The case is titled National Small Business United v. Yellen, Case No. 5:22-cv-1448-LCB.

  In the lawsuit, the plaintiffs filed a motion for summary judgment, asking the court to make a ruling without needing a jury. This type of motion is common when there are only legal issues the court needs to address.

  In its ruling on the motion for summary judgment, the court found that the Act does not have an enumerated power in the Constitution that authorizes it. Though the court was sympathetic to the idea, it rejected the notion that laws are constitutional just because they have good intentions or are allegedly for a particular purpose.

  Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.

  What’s Next for the Corporate Transparency Act?

  For the time being, the Act is not enforceable as the court has issued an injunction. The exact scope of the injunction is not immediately clear, though (whether it applies to everyone immediately, or just the named parties). The federal government will undoubtedly appeal this decision. The appeal would go to the United States Court of Appeals for the 11th Circuit.

  If the feds do appeal, there will be briefing, oral argument, and likely months before the court issues a ruling on whether to affirm or reverse. The Act may still be on hold going into 2025.

  Connell Law, PLLC is watching this matter closely and will inform our clients about this decision. Please reach out to us if you have further questions about the Corporate Transparency Act or other small business legal matters.

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• The Dangers of Commingling Personal and Business Assets

  

  When business and personal finances are mixed, both are at risk. Here’s what commingling is, the risks it carries, and how to avoid it.

  

  In the dynamic world of small business, entrepreneurs often wear multiple hats and juggle various responsibilities. One common mistake that many small business owners inadvertently make is commingling personal and business assets.

  While this might seem like a convenient way to manage finances, it can lead to significant legal and financial consequences.

  Let’s discuss what commingling is, the associated risks, and practical steps on how small business owners can effectively separate their personal and business assets so that they can thrive professionally and personally.

  Commingling Defined

  Simply put, commingling is when personal expenses and assets are intertwined with business expenses and assets. This can take a variety of forms.

  Some common practices include purchasing groceries with a business debit/credit card, using a vehicle titled in a person’s name for business purposes, and improperly taking a home office tax deduction.  

  When this happens, the business could be said to be an “alter ego” of its owners. Meaning, there is no real distinction between the business entity and the people who own and operate it. This is not just a problem for organization and taxes, but also for the legal protections that come with business entities like the LLC.

  The Risks of Commingling Personal and Business Assets

  

  Commingling personal and business assets may appear harmless at first, but it can have severe consequences for your business. Here are some of the risks this common practice carries.

  Piercing the Corporate Veil

  When personal and business assets are commingled, it is challenging to distinguish between the two. This can expose your personal assets, such as your home or personal bank accounts, to potential legal claims against your business.

  If there is no real separation between you and the business, if there is a legal dispute, a judge may determine that limited liability no longer applies. This is especially a risk when a small business is a corporation or an LLC. And small businesses are where most of the veil piercing happens when there is litigation.

  In essence, creditors or legal entities could go after your personal assets to satisfy business debts or liabilities if there is significant commingling. This puts your personal financial security at risk.

  Tax Implications

  Commingling assets complicates your tax obligations. The Internal Revenue Service requires clear separation of personal and business expenses for tax purposes. One can only deduct ordinary and necessary expenses in the course of carrying on a trade or business.

  Failure to diligently track your expenses can lead to penalties, audits, and a potential loss of tax deductions that your business may otherwise be eligible for. It’s crucial to maintain precise financial records to substantiate your business expenses.

  Difficulty in Financial Management

  Mixing personal and business finances often leads to confusion when managing cash flow, budgeting, and financial planning. This lack of clarity can hinder your ability to make informed business decisions, stalling growth and success.

  By separating your business and personal expenses, you can better understand your business’s cash flow and operating needs, as well as have a better idea of what your household needs for personal expenses. This enables you to focus on getting your profit margin up so that you can confidently grow your business.

  Separating Your Business and Personal Finances

  

  Commingling is clearly a significant risk to small business owners. To safeguard your business from the risks associated with this practice, consider the following steps to separate things out effectively.

  Establish Separate Accounts

  Open separate bank accounts for your personal and business finances. This clear division ensures that funds are kept distinct and simplifies financial tracking and reporting. When opening a business account, you generally will need to bring certain formation documents with you to the bank.

  For a corporation, this will be the corporate charter or articles of incorporation, depending on the state of formation. For LLCs, this will be the articles of organization. You will also need to bring the tax identification number assigned to your business. Businesses with multiple owners may also need to bring the bylaws or operating agreement as well.

  By having all business accounts in the business’s name and under its own tax identification number, you will have a clearer distinction between yourself and the business.

  Maintain Detailed Financial Records

  Keep meticulous records of all financial transactions related to your business. This includes invoices, receipts, and expense reports. Well-organized records will help you prove that you’ve maintained separation for tax and legal purposes.

  We recommend using accounting software like QuickBooks to track your business expenses and clearly define what constitutes an operating expense, such as payroll, owner distribution, professional fees, etc. A CPA who manages payroll and bookkeeping may also be a good resource for you to handle this administrative aspect of your business.

  Set a Salary or Distributions

  Pay yourself a salary or regular distributions from your business profits instead of commingling. This approach ensures that you receive compensation while keeping personal and business finances separate.

  Whether you do salary, distributions, or a mix depends on your business’s tax status and internal governing documents. A corporation needs to determine who the corporate officers are in addition to the board of directors. Shareholders receive distributions in accordance with the terms laid out in the bylaws. Corporate officers will receive a regular salary for performing their duties.

  An LLC can have one of two options for this. An LLC is a “disregarded entity” for tax purposes by default. Profit and loss flow to its members’ personal tax returns. In such case, the members generally take distributions as their “salary,” which is generally subject to self-employment tax.

  But you can change this by timely electing corporate tax status with the IRS. If you choose to do so, then you will need to run payroll for regular salary, and then determine what your procedure will be for owner distributions on top of that. Consult with a CPA to determine which tax status is best for you and your business.

  Work with Trusted Professionals

  Seek advice from financial planners, CPAs, and legal experts who work on small business matters regularly. They can provide guidance on proper accounting practices, tax compliance, and asset protection strategies tailored to your unique business needs.

  Final Thoughts on Commingling Personal and Business Affairs

  

  In the competitive landscape of small business, it’s vital to prioritize separation of personal and business assets. Commingling personal and business affairs exposes your household to substantial risks. These include legal liabilities, tax complications, and general financial disorganization.

  Adopt a proactive approach by establishing clear financial separation and seeking professional guidance when needed. At Connell Law, PLLC, we understand the unique challenges faced by small business owners in Tennessee. We practice small business law and can provide you with legal solutions and general business consulting to help your business thrive and safeguard your personal assets.

  Take the first step towards greater business and personal financial security. Reach out to Connell Law, PLLC today for a free consultation. Plan today for a more peaceful tomorrow.

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• Four Key Aspects of a Tennessee LLC Operating Agreement

  

  When forming a Tennessee Limited Liability Company (LLC), having a well-structured and comprehensive operating agreement is crucial to ensure the security and continuing stability of your enterprise. An operating agreement is a legal document that outlines the internal operations, rights, responsibilities, and decision-making processes of the LLC. An operating agreement is not always legally required…

  

  When forming a Tennessee Limited Liability Company (LLC), having a well-structured and comprehensive operating agreement is crucial to ensure the security and continuing stability of your enterprise. An operating agreement is a legal document that outlines the internal operations, rights, responsibilities, and decision-making processes of the LLC.

  An operating agreement is not always legally required for Tennessee LLCs. But it is often a very good idea for practical reasons. This is especially so for multi-member LLCs where there are many more variables to keep track of and deal with.

  In this article, we will discuss four key aspects of a Tennessee LLC operating agreement that help an LLC run effectively.

  1. Introduction of the LLC

  The operating agreement should begin with a clear introduction to the LLC. It should detail the LLC’s legal name, principal place of business, registered agent, purpose, and the date of formation. Also wise to include are the business’s fiscal year, tax classification, and any additional trade names. This section establishes the groundwork for the agreement and provides essential information for both members and potential investors.

  The operating agreement must align with what the LLC has in its Articles of Organization. For example, a member-managed LLC’s operating agreement should not say it is a manager-managed LLC.

  It may also be wise to state certain information such as certain professionals involved in the business’s formation and/or operations. This can include your business attorney, accountant, and any other consultants involved.

  2. Operating Agreements Describe Membership Structure and Roles

  

  An operating agreement also outlines the membership structure of the LLC by specifying the roles and responsibilities of each member. This section should include details about how to bring in new members, the process for member resignation or removal, and the ownership percentage of each member.

  Clearly defining the management structure, whether member-managed or manager-managed, is vital to avoid potential disputes. If member-managed, the members will handle daily business decisions. But if manager-managed, the members will have to hire a manager to oversee the LLC’s operations.

  A succession plan can be a part of an operating agreement as well. This ought to coordinate with what the members’ respective estate plans are. An interest in an LLC is an asset included in a person’s estate. If a member dies, the operating agreement ought to have a process laid out for selling the member’s interest and paying the value of the share to his or her personal representative or beneficiaries.

  Additionally, some members may have financial rights, but not necessarily voting rights. Laying out who these members are and clearly stating what rights such members do and do not have helps to keep all members on the same page.

  3. Capital Contributions and Allocations of Profit & Loss

  A well-drafted LLC operating agreement describes the capital contributions each member makes to the LLC and how members will divide profits and losses. This section should also cover the distribution of profits, including when and how distributions are available. Addressing these financial aspects ensures transparency and equity among members.

  Tracking capital contributions is critical to ensure that all members’ investments are properly recorded. Should a member wish to sell his or her interest, there must be a paper trail of what that member put into the business initially, along with any additional contributions.

  The allocation of profit and loss is also especially important. an LLC is a disregarded entity for tax purposes by default. The IRS treats a multi-member LLC as a partnership, and a single-member LLC as a sole proprietorship. Unless otherwise specified, under Tennessee law, members share in profits and losses equally.

  If you desire something different for your LLC, your operating agreement may specify such allocation. Remember that the LLC is one of the most flexible business arrangements available—far more flexible than the older corporation form. The LLC operating agreement can even waive some provisions of Tennessee’s default laws.

  4. Operating Agreements Cover Decision-Making and Voting

  

  The operating agreement should detail the decision-making process within the LLC. This ought to highlight major business decisions that require unanimous consent versus those that are permissible with a simple majority vote. Address issues such as quorum requirements, voting rights, and procedures for resolving disagreements.

  The operating agreement also ought to specify the scope of authority members and/or managers have to make business decisions. For example, an LLC may authorize its members/managers to make decisions in the ordinary course of business without requiring a formal vote. This may include routine purchases of inventory and authorizing payroll for the workforce.

  On the other hand, decisions such as contracting with new vendors, signing commercial leases, and hiring management personnel likely should be up to voting members/managers. The operating agreement can specify either way.

  Additionally, in an increasingly digital age, an LLC may wish to overtly allow members to attend meetings through video conferencing. The LLC’s operating agreement may permit this, or prohibit it based on what the members desire.

  A clear decision-making framework prevents conflicts and promotes efficient governance. For example, let’s say an LLC has two members, each with 50% ownership, voting rights, and sharing of profits and losses. If there is no mechanism for breaking a tie vote, the business could be stuck until the parties reach a compromise.

  The operating agreement can provide for remedies in such a situation. The engagement of business consultants or some objective criteria can provide a way to help break a tie and resume business decisions. Even mediation or arbitration may be on the table.

  Whatever the mechanism is, the operating agreement can lay out a procedure for it so that the business can continuing operating even during disagreements.

  Final Notes on Tennessee LLC Operating Agreements

  A meticulously-drafted LLC operating agreement is a cornerstone of successful business management and member relations. Each LLC will have different provisions based on its operations, membership composition, and objectives. The key is to ensure that your operating agreement provides clarity among all members about how the business will operate daily and at a high level.

  In an age of increasing entrepreneurship, it is vital that new businesses have internal governing structures in place that will help them through both good and hard times.

  For customized assistance in drafting a Tennessee LLC operating agreement, contact Connell Law, PLLC to schedule your free consultation.

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• An Overview of the Types of Business Entities Available in Tennessee

  

  Tennessee law allows for many different types of business entities. Here is an overview of some of the most common ones and when they may be appropriate.

  

  When starting a business in Tennessee, it’s important to consider the various types of business entities available and choose what’s right for you. Each type comes with its own set of legal, financial, and operational implications. Understanding the differences between them will help you make an informed choice that aligns with your business goals and objectives.

  Here is an overview of the types of business entities available under Tennessee law to consider. We will highlight some of the key characteristics of each and discuss some situations where such business entity may be desirable.

  Sole Proprietorship

  A sole proprietorship is the simplest type of business entity. In a sole proprietorship, an individual operates their business as the only owner, often with a doing-business-as (DBA) designation. While it’s easy to set up, the owner assumes full personal liability for business debts and obligations.

  This may be appropriate for business owners who are in industries with minimal liability exposure. For example, financial coaching does not involve making fiduciary decisions on a client’s behalf and is not a regulated occupation.

  But if your business will involve more serious and complex interactions with customers, especially if there are fiduciary duties, another type of business entity is likely preferable.

  General Partnership

  

  Unlike other types of business entities, general partnerships can happen “accidentally.” Under Tennessee law, the association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not they intended to do so. Accidental partnership is rare, though.

  Partners share profits, losses, and management responsibilities. Like a sole proprietorship, partners are personally liable for the business’s obligations, including personal injury and other tort claims.

  General partnerships do not require a written partnership agreement, though they are a good idea to set clear expectations for all parties involved.

  When there are multiple owners, it is important to diligently track each partner’s capital contributions to the business. The profits and losses flow through to each partner’s tax returns. Working with a CPA to track the partnership’s financials is highly advisable.

  Limited Liability Partnership

  The limited liability partnership (LLP) provides partners with limited personal liability for the actions of other partners. This shields individual partners from the responsibility arising from the negligence or misconduct of other partners. This separation encourages the creation of new businesses without undue risk to one’s personal assets based on other partners’ actions.

  The LLP provides a liability shield that general partnerships do not. General partners may be liable for the actions of other partners. But partners in an LLP are generally only personally liable for their own actions.

  LLPs must file formation documents with the Secretary of State, unlike general partnerships. The filing must include information such as the principal office, mailing address, registered agent, and a statement of the LLP’s business.

  This type of business entity may be desirable for professional occupations like law, CPA, and architecture firms.

  S-Corporation

  

  An S-Corporation is a type of business entity the Internal Revenue Code authorizes. The owners of a corporation are the shareholders. A board of directors makes high-level business decisions, and corporate officers carry out those decisions. The S-corporation is a tax designation that provides the corporation with two main benefits.

  The first benefit is limited liability protection for shareholders. The second is that profits and losses to pass through to shareholders’ personal tax returns, avoiding double taxation. Profit and losses flow through regardless of whether the S-corporation makes distributions.

  An S-corporation is “closely-held.” Shares of this type of business entity are not for sale on the open market. Federal law does not permit more than 100 shareholders in an S-corporation. S-corporations also cannot have more than one class of stock, meaning all shareholders have the same type of voting rights.

  An S-corporation may be a good type of business entity for those who are looking for private investors. Additionally, for business owners that desire to carry out business according to their personal values, the Supreme Court has held that closely-held businesses may be exempted from certain regulations that violate the owners’ religious beliefs.

  C-Corporation

  The C-corporation is also a type of business entity that provides limited liability to shareholders. They have complex governance structures and are subject to corporate taxation, which can result in double taxation.

  Companies that issue publicly-traded stock are C-corporations. Household names like Home Depot, Apple, Google (Alphabet), etc. are all C-corporations. C-corporations can have different classes of stock, unlike S-corporations. This means some shareholders may have rights that others do not.

  Like S-corporations, C-corporations generally have a board of directors, corporate officers, shareholders, and employees. The board of directors votes on major decisions and corporate officers carry out those decisions.

  If you plan on selling stock on the open market, such as the Nasdaq, a C-corporation may be the right choice for your business. But there are significant record-keeping requirements with this type of business entity. The board of directors must make decisions carefully to protect investors’ economic interests.

  Limited Liability Company

  

  A limited liability company (LLC) is one of the most flexible of all types of business entities. It combines fundamental elements of corporations and partnerships to get the best of both worlds. The LLC offers the protection of the corporate veil to shield its members (owners), as well as pass-through taxation and reduced record-keeping requirements.

  The LLC is a disregarded entity for tax purposes by default. The IRS treats single member LLCs as sole proprietorships, and multi-member LLCs as partnerships. But an LLC may elect S-corporation tax status by timely filing the Form 2553 with the IRS.

  Tennessee has two sets of LLC law. The “old act” is the Tennessee Limited Liability Company Act, and the “new act” is the Tennessee Revised Limited Liability Company Act. Both are in effect without a sunset provision. For purposes of this article, we will address the new act’s provisions for LLCs formed after January 1, 2006.

  There are three types of LLCs in Tennessee: member-managed, manager-managed, and director-managed.

  In a member-managed LLC, all members participate in management decisions. This is optimal for businesses where the members actively participate in the business (think owner-operators).

  In a manager-managed LLC, members appoint a manager or a group of managers to handle the day-to-day operations. This structure can be optimal when some members are passive investors.

  A director-managed LLC is a Tennessee-unique structure. A board of directors manages the LLC, akin to a corporation. This allows for a clear separation between ownership and management. This type of business entity looks more like a corporation than an LLC.

  Professional businesses can also operate as LLCs. Many law firms use the PLLC (Professional Limited Liability Company) structure. All members must generally be qualified to practice the profession in order to qualify for the PLLC.

  Tennessee LLCs may have a written operating agreement, but the law does not require this. For multi-member LLCs, this is highly advisable to set clear expectations among all members and to have a record of initial capital contributions.

  The LLC is one of the most common types of entities that new businesses use. Its highly flexible approach and liability protection offer the best of both sole proprietorships/partnerships and corporations.

  Which Type of Business Entity Should I Choose?

  Selecting the right type of business entity involves many factors. Important considerations include liability protection, tax implications, management preferences, and future growth prospects.

  It’s highly advisable to consult both legal and financial professionals to ensure you’re making the best decision for your specific business situation and plans.

  Connell Law, PLLC can assist with business formation and navigating Tennessee business law. Our team is here to provide you with a free consultation to ensure you’re setting your business up for success from the very beginning.

  Contact us today to schedule your consultation and take the first step towards a prosperous business journey.

  Request a Consultation

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