Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Tennessee, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The state allows businesses to be structured as corporations, general partnerships, limited partnerships, limited liability companies (LLCs), or sole proprietorships. Corporations offer liability protection but may lead to double taxation, whereas LLCs provide liability protection with pass-through taxation, avoiding the double tax. Partnerships vary in liability and tax implications, with general partners typically having personal liability. Sole proprietorships are the simplest form with no separate legal entity from the owner, leading to personal liability for business debts. Tennessee law requires different formation documents, annual reports, and fees for each entity type. For example, corporations and LLCs must file articles of incorporation or organization, respectively, with the Tennessee Secretary of State and pay an annual report fee. The choice should consider asset protection, tax implications, attractiveness to investors and lenders, the ability to offer equity to employees, and the costs of formation and maintenance. An attorney can provide guidance tailored to the specific needs and goals of the business.