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Editorial 8 MIN READ

Tennessee in March 2018: the LLC that charges you by the member

A $300 minimum to form, a $300 minimum every year to stay, and a per-member fee structure almost no other state copies

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 6 sections
  1. The fee structure, which is the point
  2. The mechanics of forming
  3. The state tax picture, which the formation fee does not tell you
  4. Maintenance and what goes wrong
  5. Who this state actually makes sense for
  6. Sources

Tennessee LLC costs $50 per member to form, subject to a $300 floor and a $3,000 ceiling. It then costs the same arithmetic every year to keep open. Almost no other state prices formation by head count, and the founders who fail to notice typically learn about it in the second year, when the second $300 bill arrives for an entity that has done nothing.

This is a guide for someone forming in Tennessee in March 2018. It is a short drive from the Delaware playbook we wrote up two years ago (Delaware in April 2016), and the contrast is instructive: Delaware charges a flat $300 and does not care how many members you have, while Tennessee charges on a sliding scale that most people only see when they read the payment screen.

The fee structure, which is the point

Tennessee's LLC filing fee is set by statute at $50 per member at the time of filing, with a minimum of $300 and a maximum of $3,000. A single-member LLC pays the floor. A two-member or five-member LLC pays the floor. A seven-member LLC pays $350. A sixty-member or 600-member LLC pays the ceiling, $3,000.

The math is simple, and the consequences are not. Three numbers follow.

Six members is the break-even seat where the per-member fee starts biting above the floor; below it, adding members is free. Sixty members is the seat where the cap binds, because 60 times 50 equals $3,000 and any additional member is free. Between those two points, every new member costs the LLC $50 on formation and $50 again every year thereafter.

The annual report fee mirrors the filing fee: $50 per member, $300 minimum, $3,000 maximum. It is due on or before the first day of the fourth month following the close of the LLC's fiscal year, which is April 1 for a calendar-year filer. The schedule is set by T.C.A. § 48-249-1017, part of the Tennessee Revised Limited Liability Company Act enacted in 2006. The Secretary of State sends a postcard reminder to the registered-office address and accepts filings online through the business-services portal.

The per-member structure is an outlier. Delaware's flat $300 annual tax does not care whether you have one member or fifty. Wyoming's annual report is the greater of $50 or a scaled figure tied to in-state assets. California's $800 franchise-tax floor ignores member count entirely. Tennessee is almost alone in pricing the ongoing filing by the header row of the operating agreement.

For founders running anything that looks like a fund, a syndicate, or an investment club, this adds up quickly. An LLC with twelve members who are personal friends chipping in on a rental is paying $600 to the Secretary of State every year before anyone has swept a porch.

The mechanics of forming

You file Articles of Organization (Form SS-4270) with the Division of Business Services at the Tennessee Secretary of State. The form is short: the LLC's name (with the required designator, such as "LLC" or "L.L.C."), the number of members at the time of filing, the principal office address, the registered agent name and Tennessee street address, and an effective date. Names are checked for availability against the state's business-entity database. The registered agent must have a physical Tennessee street address, not a post office box.

The filing can be done online, which produces same-business-day confirmation in most cases, or by mail, which runs three to five business days at the Division's discretion. The online fee is the statutory amount; there is no separate processing surcharge. Expedited service is available at the counter for an additional fee.

The member count on the Articles is the figure the Secretary of State uses to compute the filing fee, and it is the figure the LLC should be prepared to justify from its initial capital accounts. A single-member LLC with a plan to admit three more members next quarter still files as a single-member LLC today and pays the $300 floor. Admitting members later does not trigger a mid-year supplemental fee; the member count gets trued up on the next annual report.

After formation the usual federal housekeeping applies. The LLC needs an EIN, obtainable from the IRS in one session of Form SS-4 online. It needs an operating agreement, which Tennessee does not require to be filed but does recognize as the governing contract among members under T.C.A. § 48-249-203. And the default federal tax classification (disregarded for a single-member LLC, partnership for a multi-member LLC) controls unless the LLC files Form 8832 to elect corporate treatment or Form 2553 to elect S-corp treatment.

The state tax picture, which the formation fee does not tell you

Tennessee does not levy a general state income tax on wages. It does levy a franchise tax and a separate excise tax on most business entities, and it still collects a narrow tax on certain interest and dividend income through the Hall Income Tax, which is in the middle of a phase-down.

The franchise tax, T.C.A. § 67-4-2105, is 0.25% of the greater of the entity's apportioned net worth or the book value of real and tangible personal property owned or used in Tennessee, with a minimum tax of $100 per year. The excise tax, T.C.A. § 67-4-2007, is 6.5% of Tennessee-apportioned net earnings. Unlike most states, Tennessee applies these two taxes to LLCs classified as partnerships or disregarded entities for federal purposes, not just to corporations. A single-member LLC that the IRS ignores still files a franchise and excise return in Tennessee. This is the part that catches founders who assumed "no income tax" meant what it meant in Texas or Florida.

Certain LLCs qualify for the FONCE (Family-Owned Non-Corporate Entity) or obligated-member-entity exemptions under T.C.A. § 67-4-2008, which remove the franchise and excise liability for qualifying passive family-investment entities and for LLCs whose members have personally guaranteed the entity's debts. The exemptions are narrow and election- based, and they do not excuse the annual report filing with the Secretary of State. The fee math on the SOS side runs independent of the tax math on the Department of Revenue side.

The Hall Income Tax is the other wrinkle. Historically Tennessee taxed investment income (interest and dividends above a $1,250 exemption) at 6%. In 2017 the General Assembly enacted a phase-down schedule that takes the rate from 4% in 2017 to 3% in 2018, 2% in 2019, 1% in 2020, and to zero for tax years beginning on or after January 1, 2021. For 2018 filers the rate is 3%, and for LLC members who receive dividend-like distributions of investment income from a Tennessee- based partnership, the Hall tax still applies at the individual level. Two years from now it will not.

Maintenance and what goes wrong

The annual report is where most Tennessee LLCs touch the Secretary of State after formation. It is due on or before the first day of the fourth month after the close of the fiscal year, which for the overwhelming majority of LLCs means April 1. The fee is $50 per member on the report's effective date, with the $300 and $3,000 rails. Filing it online takes under ten minutes for an entity with a static membership; updating member count, registered agent, or principal office happens in the same screen.

Missing the annual report puts the LLC into administrative revocation after a grace period, and the state will publish the entity in an administrative-action notice before it dissolves. Reinstatement after administrative dissolution requires a separate application to the Division, payment of all delinquent annual report fees (at the then-current per-member calculation), and a reinstatement fee set at the standard filing-fee level. For a five-member LLC that sat dissolved for three years, the reinstatement math is the current formation fee plus three skipped annual reports, which is $1,200 before any franchise-and-excise penalties at Revenue.

The two most common failure modes, in rough order, are: founders who incorporated in Delaware by default, registered in Tennessee as a foreign LLC to do business locally, and forgot that the foreign- qualification annual report in Tennessee follows the same per-member arithmetic as the domestic one; and founders of multi-member family LLCs who did not plan for the compounding report fee and learn about it the first April after year one. Neither problem is fatal; both are avoidable.

Who this state actually makes sense for

Three categories of filer are net-positive in Tennessee.

The first is an operational small business whose owners live and work in Tennessee. The absence of a wage-level state income tax, even after accounting for the franchise and excise regime at the entity level, is a real benefit for sole proprietors and two-to-three-member partnerships converting into LLCs. A one-member LLC paying $300 a year in annual report fees and a $100 franchise-tax minimum is not a burdensome maintenance cost in dollar terms.

The second is a real-estate holding LLC owned by family members whose economics fit the FONCE exemption. The franchise-and-excise carve-out can make Tennessee materially cheaper than alternative states for a family's rental-property entity, and the Hall tax phase-down has removed the last federal-style income-tax friction at the individual level.

The third is the single-member operating LLC whose owner wants the liability shield and does not care about the per-member cap, because there is only one member. For this filer Tennessee looks like any other low-cost state at formation and an ordinary maintenance burden in year two.

The filer who should hesitate is the multi-member investment vehicle. A ten-member syndicate chipping in on a deal in another state is paying $500 a year in Tennessee SOS fees plus whatever the franchise and excise return totals, for an entity that could sit in a single-member Wyoming wrapper for $60 and foreign-qualify where it actually owns property. The per-member structure is the variable that flips the analysis; it does not flip it in every case, but it flips it often enough to check.

For a March 2018 founder in the state, file the Articles this week, open the franchise-and-excise account with the Department of Revenue inside 60 days of formation, and put April 1 on a recurring calendar. The most expensive mistake available to a Tennessee LLC is forgetting the second one.

Sources

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