1.1 Sole Proprietorships, Partnerships, and Joint Ventures

Selecting a legal business structure is one of the most consequential decisions a Tennessee contractor makes before applying for a license or submitting a construction bid. The legal form of a construction enterprise determines whether the owner's personal home, bank accounts, and equipment are exposed to jobsite lawsuits and unpaid supplier claims; how profits and losses are reported to the Internal Revenue Service and the Tennessee Department of Revenue; how additional working capital can be raised; what happens to the business and its contractor license upon an owner's death or withdrawal; and how the Tennessee Board for Licensing Contractors evaluates the firm's financial statement and monetary limitation.

Sole Proprietorships

A sole proprietorship is an unincorporated business owned and managed by a single individual. Under Tennessee and federal law, there is no separate legal existence between the sole proprietor and the business itself—the individual owner is the business.

• Formation and Administration: A sole proprietorship is the simplest, fastest, and least expensive structure to start. No formation charter or organizational filing with the Tennessee Secretary of State is required. However, a sole proprietor operating a construction business in Tennessee must still comply with all state and local licensing rules: obtaining a Tennessee contractor's license before bidding or performing projects of $25,000 or more (T.C.A. § 62-6-103), registering for county and municipal Tennessee Business Tax once gross receipts reach $100,000 per jurisdiction, and registering any trade name or DBA if operating under a name other than the proprietor's legal name.
• Management and Control: The sole proprietor holds complete managerial control over every aspect of the company—bidding, hiring, purchasing, subcontracting, and scheduling—without consulting co-owners or a board of directors. All net profits belong exclusively to the owner.
• Unlimited Personal Liability: The most critical disadvantage of a sole proprietorship is unlimited personal liability. Because the business and the owner are a single legal person, the sole proprietor is personally liable for 100% of all business debts, contract breaches, unpaid material supplier invoices, defective workmanship claims, and torts committed by employees acting within the scope of employment. If a jobsite judgment or unpaid debt exceeds the business's insurance coverage and commercial bank balance, creditors can seize the owner's personal assets, including personal savings accounts, investment accounts, vehicles, and personal real estate. When a sole proprietor applies for a Tennessee contractor's license, both business and personal assets and liabilities appear on the financial statement used to calculate Working Capital and Net Worth.
• Continuity and Termination: A sole proprietorship has no separate perpetual legal existence. Death ends the owner's personal operation; incapacity or an asset sale requires a succession plan rather than automatically dissolving every business obligation. Heirs or purchasers cannot assume the contractor license without the Board's required application or transfer.
• Federal Tax Treatment: A sole proprietorship is a pure pass-through tax unit. It files no separate entity income tax return. Instead, the owner reports gross construction revenues, cost of goods sold, and deductible business expenses on IRS Form 1040, Schedule C (Profit or Loss From Business). Net profit from Schedule C flows to the owner's Form 1040 and is taxed at the owner's individual federal income tax bracket. In addition, if net earnings from self-employment are $400 or more, the sole proprietor must file Schedule SE and pay Self-Employment Tax of 15.3% (12.4% Social Security up to the annual wage base plus 2.9% Medicare on all net self-employment income, with an above-the-line deduction for 50% of the self-employment tax).

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General Partnerships (GP)

Under the Tennessee Revised Uniform Partnership Act (T.C.A. § 61-1-101 et seq.), a general partnership is an association of two or more persons (individuals or entities) who carry on a business as co-owners for profit.

• Formation and the Partnership Agreement: Like a sole proprietorship, a general partnership can be formed informally—even by oral agreement or implied conduct—without filing formation articles with the Tennessee Secretary of State. However, relying on an oral partnership is dangerous in construction because statutory default rules divide profits and losses equally among partners regardless of how much capital or labor each partner contributed. Every construction partnership should execute a written Partnership Agreement establishing: (1) each partner's initial capital contribution (cash, equipment, or real property); (2) exact percentages for sharing profits and losses; (3) management duties, voting rules, and dollar thresholds requiring unanimous partner approval; (4) procedures for resolving deadlocks or disputes (such as mediation or arbitration); and (5) buyout valuation formulas and procedures upon a partner's retirement, disability, death, or withdrawal.
• Mutual Agency and Fiduciary Duty: In a general partnership, every general partner is an agent of the partnership for the purpose of its business (mutual agency). Any bid, subcontract, equipment lease, or credit application signed by one general partner within the ordinary course of the construction business binds the partnership and all other partners—even if a partner acted contrary to an internal discussion, unless the third party had actual knowledge that the partner lacked authority. Partners owe one another strict fiduciary duties of loyalty and care, prohibiting secret profits, self-dealing, or competing against the partnership.
• Joint and Several Personal Liability: Every general partner has unlimited joint and several personal liability for all partnership debts, contractual obligations, and wrongful acts or negligence committed by any partner or employee in the course of partnership business. A judgment creditor can sue all partners together (jointly) or collect the entire 100% debt from any single partner (severally) whose personal assets are easiest to reach, leaving that partner to pursue contribution claims against the remaining partners.
• Dissolution and Tax Reporting: A partner's death, bankruptcy, or withdrawal can cause dissociation. Whether the partnership dissolves depends on the partnership agreement, whether it is at will or for a term, and statutory dissolution events. An ownership or entity change also requires review of Tennessee Board mode-of-operation requirements (Rule 0680-01-.09). For federal taxes, a general partnership does not pay entity-level federal income tax; instead, it files an informational return on IRS Form 1065 (U.S. Return of Partnership Income) and issues a Schedule K-1 to each partner. Each general partner must report and pay individual income tax and self-employment tax on their distributive share of partnership profit on their personal Form 1040, even if the profit is retained inside the partnership for working capital.

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Limited Partnerships (LP)

Governed by the Tennessee Uniform Limited Partnership Act (T.C.A. § 61-3-101 et seq.), a Limited Partnership (LP) is a statutory business entity formed by filing a Certificate of Limited Partnership with the Tennessee Secretary of State. An LP must have at least one General Partner and at least one Limited Partner:

Because a Limited Partnership provides statutory limited liability protection and registers with the Secretary of State, it generally must register with the Tennessee Department of Revenue and pay Tennessee Franchise and Excise Tax, unless a statutory exemption applies.

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Joint Ventures and Tennessee Board Rules (Tenn. Comp. R. & Regs. 0680-01-.11 & .13(8))

A joint venture is a temporary association of two or more individuals or business entities formed to carry out a single construction project (or a specific, limited undertaking) for profit. In general business law, a joint venture is treated like a project-specific general partnership: members share profits, losses, equipment, and expertise, and face joint and several liability for the venture's project obligations.

On the Tennessee Business and Law exam, you must master the strict licensing rules governing joint ventures under Tenn. Comp. R. & Regs. 0680-01-.11 and 0680-01-.13(8):

$$\text{Combined JV Limit} = \sum_{i=1}^{n} \text{Limit}_{i} \quad \text{(only if each Classification}_{i}\text{ is integral and Limit}_{i} \ge \text{Scope}_{i}\text{)}$$

• Combining Monetary Limits Across Licensed Joint Venturers (Rule 0680-01-.11): Two or more contractors who each hold an active Tennessee contractor's license may form a joint venture and combine their monetary limits to bid on a project that exceeds their individual limits ONLY IF two mandatory requirements are satisfied:
  1. Each participating contractor holds a license classification that is a necessary and integral part of the overall construction project; AND
  2. Each participating contractor's monetary limit is sufficient to cover the portion of the project work that specific contractor will perform.
• Unlicensed Member Requires a Separate Joint Venture License: If an unlicensed entity or individual joins with a licensed contractor in a joint venture, they cannot bid under the licensed contractor's existing license. The joint venture must submit a full application and obtain its own separate Tennessee joint venture license before bidding.
• Prohibition on Combining Multiple Classifications on a Single License (Rule 0680-01-.13(8)): A single contractor that holds multiple classifications with separate monetary limits on its own license (for example, $500,000 in BC-B Commercial and $200,000 in MU Municipal and Utility) may NEVER combine those separate classification limits to bid a $700,000 contract. Each classification limit on a single license is standalone.
• Restricted Residential License (BC-A/r) Prohibition: Holders of a Restricted Residential Limited License (BC-A/r, limited to $125,000) are strictly prohibited from forming a joint venture.

Worked Numeric Example: Compliant Joint Venture vs. Unlawful Single-License Stacking

Suppose a county utility district solicits bids for a $1,800,000 wastewater pump station project consisting of $1,100,000 in commercial building work (BC-B) and $700,000 in municipal utility piping (MU).

• Compliant Two-Contractor Joint Venture: Apex Builders, Inc. holds an active Tennessee license in BC-B with a $1,200,000 monetary limit. Volunteer Utility, LLC holds an active Tennessee license in MU with an $800,000 monetary limit. Because both BC-B and MU are necessary and integral parts of the project, Apex's $1,200,000 limit covers its $1,100,000 building scope, and Volunteer's $800,000 limit covers its $700,000 utility scope, they may form a joint venture with a combined bidding capacity of $\text{\textdollar}1,200,000 + \text{\textdollar}800,000 = \text{\textdollar}2,000,000$ and lawfully bid the $1,800,000 contract.
• Unlawful Single-License Combination: Suppose instead that a single company, Smoky Mountain Contracting, Inc., holds one Tennessee license listing both BC-B with a $1,200,000 limit and MU with an $800,000 limit. Under Rule 0680-01-.13(8), Smoky Mountain Contracting cannot add its $1,200,000 and $800,000 limits together to bid the $1,800,000 project.

Source check (October 13, 2026): Tennessee Uniform Limited Partnership Act of 2017, § 61-3-303.