What to do, what to do? In the 1990s, Tennessee business owners by the office-load formed limited liability companies as their legal structure of choice. The LLC conferred tax advantages that incorporating did not. As the ‘90s drew to a close, the attractiveness of the LLC was diminished, thanks to a broadened excise tax. But then, just as business owners were returning to the familiar land of Inc., corporate scandals on the largest scale—Enron, Tyco, etc.—rocked their confidence in the safe, if staid, refuge of old.

Coupled with ignorance, or at best, a lapse in remembering why incorporating was so long a safe haven in the first place, many corporation-shy business owners were left uncertain just what to do.

Lawyers like Larry Soderquist say this indecision is as unfortunate as it is unnecessary.

“Operating without a business entity is rarely a good idea, as the owner has unlimited personal liability,” says Soderquist, who practices law with Dinsmore & Shohl and is a professor of law at Vanderbilt University.

Without incorporation, the individual is subject to heavy penalties that must be borne independently. Compared with these costs, the fees necessary to incorporate are miniscule.

“The costs of proper legal representation for setting up a corporation and seeing that it¹s run properly are not great,” Soderquist says.

Bruce Doeg, chair of the corporate group at Baker, Donelson, Bearman & Berkowitz, also recommends incorporation versus sole-proprietorship or partnership for reasons beyond liability concerns.

“It is crucial to be an entity so that a business can borrow money, raise capital and obtain licensure,” Doeg says. “It’s a validity issue.”

One option of incorporation, the LLC, has been attractive because it maintains the same liability coverage as a corporation while oftentimes evading the double taxation to which corporations are subject. This flexibility of being treated like a partnership while essentially functioning as a corporation has contributed to the popularity of LLCs in Tennessee—as of Dec. 31, 2003, the total figure had increased to 32,829. Despite this seeming popularity, those looking to form an LLC in Tennessee might want to instead consider becoming a corporation for several reasons.

In 1999, the tax advantage of being an LLC was removed in Tennessee. Prior to the change, there was no excise tax—a tax on net earnings for the privilege of doing business in Tennessee—which is now present at a rate of 6.5%. This is the same rate that corporations have always been taxed.

Furthermore, the LLC laws of Tennessee are fairly out-of-date. Although the Tennessee Bar Association is working on proposed revisions to these laws, they do not offer as much flexibility as other states’.

Tennessee corporate statute, however, is a different story.

“Tennessee has a very modern corporate statute that’s been amended a number of times to be kept up-to-date,” says Soderquist, one of the drafters of the statute. In an effort to stay current in the world of corporate law, Tennessee was the second state to adopt the Model Business Corporation Act in 1988, which allows for personal assets to be held by a corporation, therefore insulating the owners from liability.

For this reason and others, lawyers like Soderquist recommend organizing as a corporation rather than an LLC.

Then there is the issue of stability gained through maturity, of which corporate laws also have an advantage.

“The modern corporation has been around for 125 years,” Soderquist says. “There is a great sameness to corporation laws, many fine-tuned statutes, and many cases in court over the years that clear up ambiguities in corporate law. LLCs, on the other hand, have been drafted by scratch. They’ve had no time to be fine-tuned and are essentially unchartered waters.”

In addition to its statutory maturity, incorporating in Tennessee is very sensible due to modest taxes.

“Tennessee taxes are very favorable,” Soderquist says. “Large corporations can save thousands of dollars by incorporating in Tennessee.”

Despite its numerous advantages, regular incorporating isn’t the best route for everyone, particularly for such professional groups as law, accounting, and architectural firms. With these groups, transitioning to an LLC allows the firm to maintain its identity as a partnership.

“Most professional groups were partnerships, so they have to change very little in the way that they operate,” Soderquist says. “Also, an LLC fits these groups better in terms of business vernacular. Rather than calling one another a shareholder, as you would in a corporation, owners would be called members. It’s more comfortable for everybody.”

In addition to keeping the identity of a partnership, firms that select LLC status will still retain limited liability, arguably the most important feature of incorporating.

Therefore, no matter what legal structure a business chooses, a main function of any such entity must be the protection of owners in matters of liability. No amount of press surrounding Enron-flavored scandals should dissuade entrepreneurs from pursuing corporate status.

“Many people worry and wring their hands about direct and potential liabilities with a corporation,” says Gary Brown, a partner with Dinsmore & Shohl who was also on a special council to the Senate in charge of the Enron investigation in 2002. “People seem to be concerned about some sort of new liability, but really there isn¹t any. There is enhanced scrutiny on directors, but no new rules. If people do the right thing, they’re protected.”

Even if an individual acts responsibly in a sole proprietorship or partnership, however, there is always the risk of lawsuit due to injury or an action taken by a business partner that could result in drastic consequences. Waiting until then to incorporate is too late.