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Start Your Business Entrepreneurs

The State of Small Business: Tennessee

The State of Small Business: Tennessee

As part of our yearlong project "The State of Small Business," Business News Daily plans to report on the small business environment in every state in America. In this installment, we asked a few of Tennessee's more than 500,000 small business owners about the challenges and opportunities of operating in their state. Here's what they had to say.

Tennessee's entrepreneurs are heartened by the overall low tax burden they face, an exceptional cost of living, and easy access to multiple large markets and highway corridors. Among these major opportunities, entrepreneurs also report ease when dealing with state and local governments, as well as a supportive community of entrepreneurs and development organizations to turn to for advice.

The drawbacks are a shortage of skilled, technical labor due to immensely high demand, a modest per capita personal income, and exorbitant sales taxes that are the highest in the nation. It's a good sign for Tennesseans, though, that two of these major challenges – modest per capita incomes and high sales taxes – are canceled out by the low cost of living and the manageable overall tax burden.

Memphis and Nashville are two large cities that are also massive draws for a tourist economy. Both cities are about 3.5 times larger than the third largest city of Knoxville, and each has a rich culture surrounding Tennessee's famous music scene and the legendary rock and roll to come from the state. Music City and the Bluff City are about 200 miles apart from one another; Memphis is located in the southwest corner of the state while Nashville lies to the northeast, in the center of the state. Knoxville is situated to the east of Nashville. This means that virtually wherever you are in Tennessee, a large market is at most a few hours away.

The cost of living is particularly reasonable in Tennessee even compared to some of its regional neighbors. Sperling's Best Places rated Tennessee's overall cost of living at 86.5 percent of the national average, with particular affordability when it comes to housing. However, there's a lot of construction being done in Tennessee, particularly in Nashville, which is likely to drive costs up in the future.

"Real estate is hot in Nashville. There are about 15 to 20 cranes up, as there is a lot of new construction taking place," Dennis Sims, Nashville district manager of business advisor Insperity, said. "Still, it's much more affordable than many other cities across the nation, and the standard of living is great."

"[We have] an extremely low cost of living, especially compared with the East and West coasts," added Bryan Clayton, CEO of lawn care service GreenPal.

It's also worth noting that per capita personal income is lower in Tennessee than in the U.S. as a whole as well, ringing in at about $42,000, or 88 percent of the national average, according to the U.S. Bureau of Economic Analysis. This balances out the benefits of Tennessee's low cost of living, but if you're moving from a state with a higher per capita personal income, you'll be able to stretch your dollar a bit further.

While Tennessee's economic growth isn't as strong as the national average, it's stable and climbing. From 2013 to 2014, the state's economy grew by 1.6 percent in real terms compared to the U.S. growth rate of 2.4 percent. 2014 to 2015, Tennessee's economy grew by two percent. Neither of these numbers are worth celebrating, but the growth is steady and predictable, a sure sign that Tennessee's economy is relatively stable. That makes it easier for entrepreneurs to feel secure investing in their business, rather than preparing to weather the storm of an impending recession.

Tennessee's sales tax immediately stands out; it's the highest sales tax in the nation at seven percent. When combined with the average local tax rate, Tennessee's sales tax rises to an average 9.46 percent. In Tennessee, the corporate income tax rate stands at a flat 6.5 percent.

However, there is a major caveat that turns the tax burden into a more manageable one for business owners. Tennessee's most forgiving tax is a flat six percent personal income tax on dividends and interest income only; salaries and wages are not taxed at all in Tennessee. New Hampshire and Tennessee are the only two states in the U.S. that utilize this method of taxation. That means entrepreneurs can incorporate as a "pass-through entity," such as an LLC, which is taxed on the personal income rate rather than the corporate income rate.

"The challenges specific to the State of Tennessee mainly surround the … sales tax, which can make purchasing higher dollar equipment quite a bit more expensive for small companies," Jake Rheude, director of business development and marketing for e-commerce company Red Stag Fulfillment, said. "This is of course a tradeoff for not having a state income tax, and personally, I would much rather be taxed on my consumption rather than my earnings."

On paper, Tennessee's labor force looks healthy. Unemployment is down to about 4.1 percent, the labor force has grown to more than 3.1 million people over the last few years, and companies are hiring. However, many entrepreneurs reported that skilled labor is in high demand right now, particularly in the tech industry.

"A challenge right now is attracting skilled labor," Sims said. "Companies need to focus on attracting new talent, and engaging and retaining current employees.

The problem isn't that skilled labor isn't available in Tennessee, small business owners reported, it's that they're in such high demand. As some companies hire technically skilled workers, others open positions remain vacant. Entrepreneurs in Tennessee, like most places in the U.S., are clamoring for evermore technically capable employees.

Still, the technically skilled workers in Tennessee are available at lower salaries than elsewhere, according to Clayton.

"[There is] a plethora of software engineers and developers at salaries that are half of where they are at her tech hotbeds," Clayton said.

If you're a small business owner in Tennessee looking for resources to help you move forward, here are a few organizations you might want to learn more about.

Tennessee SCORE

SCORE's volunteer business professionals and expert "mentors" give counsel and guidance to entrepreneurs looking to start or expand their businesses. The services are entirely free and volunteer-driven. Here are some of the chapters in Tennessee. 

Chattanooga SCORE
Greater Knoxville SCORE

Memphis SCORE
Nashville SCORE

U.S. Small Business Administration (SBA) District Offices

The U.S. SBA offers financing and grants, as well as consultations and counseling services. There are also opportunities to apply for federal government contracts through the SBA and avenues for obtaining assistance in the wake of natural disasters.

Tennessee SBA District Office

The Entrepreneur Center

This accelerator offers access to mentors for startups and small businesses alike in a bid to "build a community where entrepreneurs have access to capital, customers, and the talent they need to be successful." The Entrepreneur Center host workshops and meetups on a diverse array of topics. Links to locations in Knoxville and Nashville are listed below.

The Nashville Entrepreneur Center
The Knoxville Entrepreneur Center

Tennessee Small Business Development Centers

Tennessee hosts a number of development centers for small business. Each is dedicated to supporting the development and retention of small business, helping entrepreneurs do everything from craft business plans to navigate the state's tax code. You can find your region's small business development center at the link below.

Tennessee SBDC Network

Are you an entrepreneurial organization or resource for small business owners, but are not listed here? Let us know. Contact the author at auzialko@purch.com.

Adam C. Uzialko

Adam received his Bachelor's degree in Political Science and Journalism & Media Studies at Rutgers University. He worked for a local newspaper and freelanced for several publications after graduating college. He can be reached by email, or follow him on Twitter.