Tennessee LLC structure and cost: the no-income-tax state that taxes your LLC anyway, unless the family owns the rentals

Tennessee is famous for having no personal income tax, and people form LLCs there expecting the profits to pass through untaxed at the state level. Then they meet the franchise and excise tax. Tennessee taxes LLCs directly, at the entity level, with a 6.5% excise tax on net earnings and a 0.25% franchise tax on net worth, and that liability exists regardless of the absence of a personal income tax. The “no income tax” headline is true for wages and misleading for a business owner, because the business itself is taxed.

What makes Tennessee interesting is the way out. Two exemptions let an LLC escape the franchise and excise tax entirely, and both reveal something about how Tennessee thinks about entities. One rewards a family holding passive real estate. The other rewards giving up the very protection the LLC was formed to provide. Take the tax first, then the exits.

The entity tax the headline hides

The franchise and excise tax is the number that surprises people who form in Tennessee for the tax reputation.

A Tennessee LLC pays 6.5% excise on its net earnings and a 0.25% franchise tax on its net worth, with a $100 minimum, at the entity level.

Since Tennessee broadened its franchise and excise tax to cover all business entities, an LLC is subject to both taxes. The excise tax is 6.5% of the LLC’s net earnings, close to a corporate income tax by another name, and the franchise tax is 0.25% of the LLC’s Tennessee net worth, with a $100 minimum that applies even to a company with little net worth or no revenue. Both are filed on Form FAE-170. So an ordinary active-business Tennessee LLC that earns money pays entity-level tax on it, which is a genuine cost that the “no income tax” framing hides, and it applies on top of the per-member filing fees on the filing page.

The family exemption that fits rental real estate

The first way out is built for exactly the structure many real estate investors use.

A family-owned LLC whose income is mostly passive, like rents, is exempt from the franchise and excise tax under the FONCE exemption.

Tennessee’s family-owned non-corporate entity exemption, under T.C.A. § 67-4-2008, exempts an LLC from franchise and excise tax when at least 95% of it is owned by family members and at least two-thirds of its activity is passive investment income, which the statute defines to include rents from farm or residential property, royalties, dividends, and interest, or farming. That is a precise description of a family real estate holding company, and it is why so many Tennessee rental-property LLCs are structured as family-owned entities: done right, the family LLC holding rental real estate pays no franchise or excise tax at all. A 2026 amendment broadened which relatives, trusts, and estates count toward the 95% threshold, so confirm the current criteria before relying on the exemption. The exemption is claimed and renewed annually on a state form, not automatic, so it has to be filed and maintained.

The exemption that costs you the veil

The second way out is available to any LLC, and it comes at a price that defeats the point for most.

An LLC whose members agree to be personally liable for its debts is exempt from the franchise and excise tax, so the tax break costs the liability shield.

Tennessee’s obligated member entity exemption lets an LLC escape franchise and excise tax if all of its members agree, in the LLC documents, to be personally liable for the company’s debts. Read that carefully: to get the tax exemption, the members give up limited liability, the single most important thing an LLC provides. For almost every owner that is a bad trade, because the reason to form an LLC is the liability shield, and surrendering it to save the excise tax exposes personal assets to every business creditor. The obligated member entity exists, and it occasionally fits a low-risk professional or holding structure, but it is the rare case where the tax saving is worth the exposure. Its existence is mostly a reminder that in Tennessee the liability shield and the entity tax are linked: the state taxes the protection, and only entities that forgo the protection, or that qualify as passive family holdings, get out.

Series, transfer tax, and privacy

Three more structure points round out the picture.

Tennessee authorizes series LLCs, taxes real estate transfers at 0.37%, and puts LLC information on the public record.

Tennessee is a series state: T.C.A. § 48-249-309 permits a series of members, managers, interests, or assets within a single LLC, so a multiple-property owner can wall off assets internally, though the inter-series shields are less tested than separate LLCs and should be treated as strong on paper and unproven in an out-of-state court. The series LLC guide covers the trade-offs. On transfers, Tennessee imposes a realty transfer tax of about 0.37% of value, modest next to the Northeast. On privacy, Tennessee is not an anonymity state, because the articles of organization are public and carry the company’s management and organizer information, so the anonymous LLC structures that create real privacy involve a holding entity formed elsewhere.

The bottom line

A Tennessee LLC pays a 6.5% excise tax on net earnings and a 0.25% franchise tax on net worth, at the entity level, despite Tennessee having no personal income tax.

A family-owned LLC with mostly passive income, like rental real estate, is exempt under the FONCE exemption, which is why family rental LLCs are common in Tennessee.

An LLC can also escape the tax by having its members accept personal liability, but that trades away the liability shield the LLC exists to provide.

Tennessee authorizes series LLCs under T.C.A. § 48-249-309, so a multiple-property owner can wall off assets within one entity.

The realty transfer tax is a modest 0.37%, and Tennessee is not a privacy state, since the articles are public.

What this page does not cover

This page is about where the entity lives and what it costs to hold and move. How creditors reach a member’s interest, the exclusive charging order, and the strong entireties shield are on the protection page. How Tennessee splits a membership interest into governance and financial rights, and the three ways to manage the company, are on the governance page. The per-member filing fees and the April deadline are on the filing page.

Last verified August 2026.