Start a business in Tennessee

Tennessee has a reputation as a no-tax state, and on the thing most people mean by that it is entirely accurate: there is no state tax on wages, and the Hall tax on interest and dividends was fully phased out at the start of 2021. The money that reaches a founder's own pocket is not taxed on the way.

The entity is a different story, and it is a busier one than the reputation suggests. Two state taxes apply to the business, and the licence for one of them is issued locally even though the tax is collected by the state. That split is the source of most of the confusion around operating here.

Worth knowing before anything else: Tennessee is not a cheap state to keep an LLC in. Formation is $50 per member with a $300 minimum and a $3,000 cap, the annual report is $300, and there is a $100 minimum franchise tax on top. Five years comes to $2,000 — the highest of any state in this region by a wide margin. The LLC hub has the comparison.

Alongside franchise and excise, Tennessee levies a separate business tax on gross receipts. It is not a component of the franchise and excise tax and it is not a licence fee. It is a distinct tax, under a different part of the code, with its own return.

What makes it genuinely odd is the division of labour. The licence is issued by the county clerk, and by the city clerk as well if your address falls inside a municipality. The tax is administered and collected by the state Department of Revenue through TNTAP. So you queue at a county office for a piece of paper attached to a tax you will file with Nashville.

The franchise and excise tax is what most people find when they search for Tennessee business tax, and it is not the tax described above. It has two parts: an excise tax at 6.5% on net earnings, and a franchise tax with a $100 minimum. LLCs are subject to both unless they qualify for a specific exemption.

The $100 minimum is the number to hold on to as a small business, because it is what you owe in a year with no profit at all. Add the $300 annual report — due the first day of the fourth month after your fiscal year ends, which is 1 April for most — and Tennessee's fixed annual cost is $400 before anything variable. That is why the five-year figure is what it is.

The two taxes are filed separately, on separate returns, on separate schedules. There is no arrangement under which paying one reduces the other. If someone tells you that your franchise and excise filing covers your business tax obligation, they have confused the two, and it is the single most common confusion in this state.

Having been careful about what the state charges the entity, be equally clear about what it charges the owner: nothing.

There is no state income tax on wages. There is no tax on interest and dividends — the Hall tax, which used to catch investment income, was fully phased out at the start of 2021. No Tennessee city or county levies an income tax either. Your draws, your salary and your investment income are untouched by this state.

That is not true in a single one of Tennessee's eight neighbours. Kentucky charges 3.5% at state level and lets cities, counties and school boards tax payroll and net profits on top. Georgia charges a flat 4.99%. North Carolina 3.99%. Alabama municipalities withhold an occupational tax on gross wages. Virginia 5.75%. Tennessee takes the entity tax and stops.

For an owner-operated business that pays itself well, that is a large annual number and it is the honest reason people move businesses here. It is worth weighing against the $400 of fixed entity cost and the business tax, not instead of them.

Tennessee's state sales tax rate is 7%, the highest state-level rate in the United States, and counties and cities may add up to 2.75% on top. That puts the combined rate at roughly 9.25% to 9.75% across most of the state — close to ten cents on every dollar.

These rates are long-standing, but they were not re-verified against the Department of Revenue in this pass. Confirm the local rate for your county on TNTAP before you quote it to a customer.

Registration is free on TNTAP. The practical point for a retail or hospitality business is that a near-10% rate is visible on the ticket in a way a 6% rate is not, and it interacts with how you present prices. It is also, of course, the other side of having no income tax — the state collects at the till instead of on the payslip.

A non-construction Tennessee employer needs workers' compensation at five or more employees. Minors, working family members and part-time employees all count toward the five. That is one of the highest thresholds in the country and a genuine saving for a small team — a four-person firm here carries no premium, where the same firm in Kentucky has been covered since its first hire.

Construction is a different regime entirely and the difference is stark. Any construction service provider with one or more employees must carry cover, and the owner must be covered too unless they qualify for and obtain an entry on the state's Exemption Registry.

Read that registry rule carefully, because it is narrower than people assume: the exemption covers only the named individual. It does not cover the business and it does not cover the business's employees. A registered exemption for the owner does not remove the requirement to cover the labourer working alongside them.

For unemployment insurance, register as a new employer with the Department of Labor and Workforce Development on Jobs4TN.gov through Unemployment Employer e-Services, which issues an eight-digit employer account number. The exact liability threshold, 2026 taxable wage base and new-employer premium rate were not confirmed in this pass — the department's unemployment insurance tax pages carry the current figures.