Are you considering starting a business in either Alabama or Tennessee? One of the first steps is deciding which type of legal entity to form.
Limited Liability Companies (LLCs) are becoming an increasingly popular choice due to their flexibility and liability protection benefits.
Here we will provide a side-by-side comparison of Alabama vs. Tennessee LLCs, highlighting the key differences in company formation, operating agreements, management structures, taxes, and asset protection.
Alabama vs. Tennessee LLC
Formation and Structure: Alabama and Tennessee both recognize LLCs as a business entity option, providing limited liability protection to owners.
Operating Agreement: Having an operating agreement is advisable in both states to establish guidelines for internal operations and member rights.
Taxation: Alabama imposes a Business Privilege Tax and state income tax on LLCs, while Tennessee does not have a state income tax but imposes franchise and excise taxes on certain LLCs.
| Alabama LLC | Tennessee LLC |
|---|---|
| Alabama charges a formation fee of $200. | Tennessee requires a formation fee of $300. |
| It imposes a Business Privilege Tax on LLCs. | It does not have a Business Privilege Tax for LLCs. |
| Alabama has a state income tax that applies to LLCs electing corporate taxation. | Tennessee does not impose a state income tax on LLCs, regardless of taxation election. |
| It does not impose a franchise and excise tax on LLCs. | It imposes a franchise and excise tax on LLCs electing corporate taxation based on net worth or property value. |
| Alabama’s state sales tax rate is 4%. The average combined state and local sales tax rate is 9.25%. | Tennessee’s sales tax rate ranges from 7% to 9.75% depending on the locality. |
| It is required to file an annual report, which incurs a fee of $50. | It is required to file an annual report, which incurs a fee of $300. |
| Alabama’s property taxes are relatively low. The average effective property tax rate is 0.73%. | Tennessee’s property taxes are slightly higher than Alabama’s. The average effective property tax rate is 0.84%. |
Cost Breakdown of The Two
You may use our free LLC cost calculator by state to find out filing fees, tax percentages, income taxes, and more.
Alabama
The filing fee for forming an LLC in Alabama is $200.
Alabama imposes an annual Business Privilege Tax on LLCs, which is based on the LLC’s net worth or net capital. The tax rate varies, with a minimum tax of $100.
If the LLC elects to be taxed as a corporation for federal tax purposes, it may be subject to Alabama state income tax.
Tennessee
The filing fee for forming an LLC in Tennessee is $300.
LLCs in Tennessee that elect to be taxed as corporations for federal tax purposes are subject to franchise and excise tax.
The tax is based on the LLC’s net worth or the greater of its net worth or the value of its real and tangible personal property in Tennessee.
Tennessee does not impose a state income tax on individuals or corporations, including LLCs.
Related Posts:
- Alabama LLC: Cost Breakdown, Pros and Cons, Requirements
- Tennessee LLC: Cost Breakdown, pros and cons, requirements
Similarities Between Alabama and Tennessee LLC
Both Alabama and Tennessee provide limited liability protection to LLC owners, known as members.
This means that the personal assets of members are generally protected from the debts and obligations of the LLC.
The process of forming an LLC is similar in both states.
It involves filing the necessary formation documents, such as articles of organization, with the Secretary of State or a similar governing agency.
The filing fees and requirements may differ slightly, but the overall process is comparable.
While not mandatory in either state, having an operating agreement is highly recommended for LLCs in both Alabama and Tennessee.
The operating agreement outlines the internal operations, management structure, and financial arrangements of the LLC, providing clarity and guidelines for the members.
Both Alabama and Tennessee LLCs offer flexibility in terms of management.
LLCs can be managed by members, where all members have a say in the decision-making process, or they can appoint managers to handle day-to-day operations.
In both states, LLCs are typically subject to pass-through taxation.
This means that the LLC itself does not pay federal income tax; instead, the profits and losses of the LLC are “passed through” to the individual members, who report them on their personal tax returns.
Both Alabama and Tennessee allow LLCs to engage in professional services, such as legal, accounting, engineering, or consulting services.
Additional Resources:
Steps to Form LLC in Alabama
Choose a name for your LLC that complies with Alabama’s naming requirements.
File the Articles of Organization with the Alabama Secretary of State, including necessary information such as the LLC’s name, address, and registered agent details.
Pay the filing fee, which is currently $200, either online or by mail.
Consider drafting an operating agreement to establish rules and procedures for your LLC, although it is not required by Alabama law.
Obtain any required business licenses or permits at the local, state, or federal level, depending on your specific business activities.
Obtain an Employer Identification Number (EIN) from the IRS if your LLC has employees or multiple members.
Comply with any additional tax and regulatory requirements, such as registering for state taxes or obtaining necessary professional licenses, if applicable.
Maintain proper records and documentation for your LLC, including financial records, meeting minutes, and any changes in membership or company structure.
Renew your LLC annually by filing an Annual Report with the Alabama Secretary of State and paying the associated fee.
Steps to Form LLC in Tennessee
Choose a name for your LLC that meets Tennessee’s naming requirements, including using the words “Limited Liability Company,” “LLC,” or an appropriate abbreviation.
Conduct a business name search through the Tennessee Secretary of State’s website to ensure your desired LLC name is available and not already in use.
Prepare and file the Articles of Organization with the Tennessee Secretary of State.
This document includes information such as the LLC’s name, address, registered agent details, and the duration of the LLC.
Pay the filing fee, which is currently $300, either online or by mail.
Consider drafting an operating agreement, although it is not required by Tennessee law.
An operating agreement outlines the internal operations, management structure, and financial arrangements of the LLC.
Obtain an Employer Identification Number (EIN) from the IRS if your LLC has employees or multiple members.
Register for state taxes with the Tennessee Department of Revenue, if applicable, and obtain any necessary business licenses or permits for your specific business activities.
Comply with any additional regulatory requirements, such as obtaining professional licenses or permits for certain professions or industries.
Maintain proper records and documentation for your LLC, including financial records, meeting minutes, and any changes in membership or company structure.
File an Annual Report with the Tennessee Secretary of State each year and pay the associated fee to keep your LLC in good standing.
Feature Comparisons Between Alabama LLC vs. Tennessee LLC
Formation Process: The overall process of forming an LLC is similar in both states.
It involves filing the necessary formation documents with the respective Secretary of State’s office and paying the required filing fees.
The specific forms and fees may vary slightly.
Name Requirements: Both Alabama and Tennessee have specific naming requirements for LLCs.
The LLC name must comply with the state’s guidelines, including the use of certain words or phrases to indicate limited liability status.
Limited Liability Protection: Both states provide limited liability protection to LLC owners, shielding their personal assets from the debts and obligations of the LLC.
Operating Agreement: While not mandatory in either state, having an operating agreement is highly recommended for LLCs in both Alabama and Tennessee.
It is a legal document that outlines the internal operations, management structure, and financial arrangements of the LLC.
Taxation: There are differences in the taxation of LLCs in Alabama and Tennessee.
Alabama imposes a Business Privilege Tax and state income tax on LLCs, while Tennessee does not have a state income tax but imposes franchise and excise taxes on certain LLCs.
Annual Report Requirements: Both Alabama and Tennessee require LLCs to file an Annual Report to maintain good standing. The specific filing requirements and fees may vary.
Professional Services: Both Alabama and Tennessee allow LLCs to engage in professional services, such as legal, accounting, or consulting services.
Business Environment
Alabama
Alabama has a diverse economy that includes industries such as automotive manufacturing, aerospace, healthcare, agriculture, and technology.
The state has been actively working on attracting businesses through incentives and infrastructure development.
Alabama is known for its relatively business-friendly regulations.
The state has taken steps to streamline business processes and provide incentives for economic development.
Alabama imposes a Business Privilege Tax and state income tax on LLCs.
The tax rates vary depending on the LLC’s net worth or net capital. Alabama’s tax structure is generally considered moderate.
Alabama offers access to resources such as business development centers, industry-specific associations, and networking opportunities that can support LLCs in their growth and expansion.
Tennessee
Tennessee has a diverse and growing economy with key industries including manufacturing, healthcare, tourism, music, and logistics.
The state has a favorable business climate and actively encourages entrepreneurship and innovation.
Tennessee is often regarded as a business-friendly state with regulations that promote economic growth and development.
The state has implemented initiatives to attract businesses and streamline processes.
Tennessee does not impose a state income tax on individuals or corporations, including LLCs.
However, LLCs that elect to be taxed as corporations for federal tax purposes are subject to franchise and excise taxes based on net worth or property value in Tennessee.
Tennessee offers resources such as business development programs, incubators, accelerators, and industry-specific associations that provide support and networking opportunities for LLCs.
Read Also:
Alabama vs. Tennessee Taxes
Alabama
Alabama imposes a Business Privilege Tax on LLCs. This tax is based on the net worth or net capital of the LLC and has varying rates. The minimum tax is $100.
Alabama has a state income tax that applies to LLCs that have elected to be taxed as corporations for federal tax purposes. The tax rate ranges from 2% to 5% of the LLC’s taxable income.
Alabama has a state sales tax rate of 4%, with additional local sales taxes that can vary by location.
The total sales tax rate in Alabama can range from 4% to 11% depending on the locality.
Tennessee
Tennessee does not impose a state income tax on individuals or corporations, including LLCs.
This makes it an attractive state for businesses seeking to minimize their tax burden.
Tennessee imposes a franchise and excise tax on LLCs that have elected to be taxed as corporations for federal tax purposes.
The tax is based on the LLC’s net worth or the greater of its net worth or the value of its real and tangible personal property in Tennessee.
Tennessee has a state sales tax rate of 7%, with additional local sales taxes that vary by location.
The total sales tax rate in Tennessee can range from 7% to 9.75% depending on the locality.
Flexibility in Rules and Regulations
While an operating agreement is highly recommended for LLCs in both states, the content and specific provisions can be customized to meet the needs of the business and its members.
This flexibility allows LLC owners to establish rules and procedures that align with their unique circumstances and preferences.
Both Alabama and Tennessee provide flexibility in terms of the management structure of an LLC.
LLCs can be member-managed, where all members participate in decision-making, or manager-managed, where members appoint one or more managers to handle day-to-day operations.
Both states offer flexibility for LLCs to engage in various business activities.
LLCs in Alabama and Tennessee can operate across different industries, including professional services, consulting, retail, manufacturing, and more.
This flexibility allows businesses to pursue their desired ventures and adapt to changing market demands.
LLCs have the flexibility to choose how they want to be taxed for federal purposes.
By default, LLCs are treated as pass-through entities, where profits and losses pass through to the individual members’ personal tax returns.
Key Differences Between Alabama and Tennessee- An Overview
