How does Tennessee tax small businesses?
David TalleyUpdated December 3, 2025
Quick Answer
Tennessee imposes a franchise tax (0.25% of net worth, minimum $100) and excise tax (6.5% of net earnings) on most business entities. Sole proprietors are exempt, but single-member LLCs owned by individuals are subject to franchise and excise tax even though they are disregarded federally. S-Corps pass through income to shareholders who then report on their individual returns. Understanding these taxes is crucial when choosing your business structure.
Tennessee doesn't have individual income tax, but business taxes are a different story.
The two main business taxes:
Franchise Tax:
- 0.25% of net worth (the property measure was repealed in 2024)
- Minimum $100
- Applies to corporations, LLCs, partnerships, and other entities
- Single-member LLCs owned by an individual are NOT exempt: they must file and pay franchise and excise tax even though they are disregarded federally
Excise Tax:
- 6.5% of net earnings (federal taxable income with adjustments)
- Applies to the same entities as franchise tax
- Based on apportioned income if you do business in multiple states
Who pays what:
Sole Proprietor:
No franchise or excise tax. Your business income flows to your personal federal return, and Tennessee doesn't tax personal income.
Single-Member LLC:
Generally treated as a disregarded entity, same as sole proprietor for Tennessee purposes. No franchise or excise tax.
Multi-Member LLC or Partnership:
Subject to franchise and excise tax at the entity level.
S-Corporation:
Subject to franchise and excise tax on its net worth/earnings. Income also passes through to shareholders (not taxed at shareholder level in Tennessee since there's no individual income tax).
C-Corporation:
Subject to franchise and excise tax. Dividends paid to shareholders aren't taxed at the shareholder level in Tennessee.
What this means for structure choice:
If you're staying small, sole proprietorship keeps you out of Tennessee franchise and excise tax; a single-member LLC does not (it files its own F&E return). Once you add partners or elect S-Corp status, you're in the franchise/excise system.
It's one factor among several when deciding business structure, don't choose based solely on this.
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