Since the mid-1990s, the formation of limited liability companies has increased significantly in Tennessee and Georgia. As described below, this makes sense. LLCs allow taxpayers to take advantage of limited personal liability for business obligations while also offering simplified, and perhaps advantageous, tax opportunities. Specifically, LLCs are favored by small, owner-managed businesses that want flexibility without a lot of corporate formality. Like shareholders in a corporation, LLC owners are protected from the personal liability for business debts and claims. Further, IRS rules allow LLCs to choose between being taxed as a partnership or a corporation.
By electing partnership, the profits generated by the LLC are passed through to the owners (no double taxation) and reported on the individual tax returns for the owners and not at the business level. As a result, filing taxes is often simpler for the members of an LLC. Also, the losses and operating costs of the LLC can be deducted on personal tax returns, which can help offset other income.
As a firm located near the Tennessee and Georgia state line, we are often asked the question: “Is it better to form a limited liability company in Tennessee or in Georgia?” The answer is, as expected, it depends. In Georgia, the filing fee to form an LLC is $100.00 (as of September 2020) with an annual renewal of $50.00. In Tennessee, the filing fee is $50.00 per member, with a minimum fee of $300.00 and a maximum fee of $3,000.00. There is also a minimum annual renewal fee of $300.00. Notwithstanding the initial filing fee and annual renewal fees, the major deciding factor between choosing Tennessee or Georgia, at least as it relates to tax exposure, will likely come down to assessing the difference between Georgia's state income tax vis-à-vis the Tennessee franchise and excise tax on LLC income; unlike Georgia, Tennessee does not have a personal income tax.
If you are a full-year Georgia resident, you will have to file a Georgia state tax return and pay the applicable state income tax if (1) you are required to file a Federal income tax return; (2) you have income subject to Georgia income tax that is not subject to Federal income tax; or (3) your income exceeds the standard deduction and applicable personal exemptions. If you are a non-Georgia resident that receives income from a Georgia LLC, you will be required to file a Georgia state tax return. However, taxpayers who itemize their deductions on their Federal income tax returns can deduct a certain percentage and/or up to a certain dollar amount of their Georgia income taxes. Since 2018, the Georgia legislature has engaged in continuous tax reform efforts which upon the passing of Georgia House Bill 949 consolidated the state's six individual income tax brackets into one and reduced the top rate from 5.75% to a new 5.375% flat rate for 2021. Currently, Georgia has six marginal tax brackets, ranging from 1% (the lowest Georgia tax bracket) to 5.75% (the highest Georgia tax bracket).
If you own a Tennessee LLC, the State of Tennessee imposes two taxes for the privilege of doing business within its boundaries. These taxes are franchise and excise taxes. The franchise tax is an asset-based tax calculated on the greater of the LLC's net worth or the book value of real and tangible personal property owned or used in Tennessee at the end of the taxable period. The franchise tax rate is $0.25 per $100, or major fraction thereof, applied to the greater of a taxpayer's net worth or the book value of property owned or used in Tennessee at the close of the tax year covered by the required return. The minimum franchise tax payable each year is $100. Even if your business is inactive or has had its charter or other registration forfeited, but has not been legally dissolved, it is not relieved from filing a return and paying the minimum franchise tax. The minimum tax is $100.00. The excise tax is a 6.5% tax on the net earnings or income of the Tennessee LLC.
As demonstrated above, each state offers its own respective benefits and every client has its own unique interests that must be considered. Importantly, tax evaluations are one of many considerations we review when clients contact Litchford, Pearce & Associates (“LPA”) to inquire about forming a company. Other considerations include such issues as ownership structure, membership rights, voting rights, income distribution, privilege fees, and employment matters. LPA recognizes the importance of assisting clients with all facets of starting a new business and, further, LPA structures its legal representation to walk side-by-side with clients throughout their business journey. If you have any legal needs, please contact any of the professionals at LPA. The firm has offices in Chattanooga (5726 Marlin Road, Chattanooga, Tennessee, 423-529-5290) and Colorado (1755 Telstar Drive, Suite 300, Colorado Springs, Colorado, 719-428-5004) and operates as a full-service law firm. LPA's attorneys are licensed in Tennessee, Georgia, Colorado, and Kentucky.