Partnership vs. LLC in Tennessee: Avoid Costly Real Estate Pitfalls

Why your entity choice matters in Tennessee real estate

How you hold title to Tennessee investment property—through a general partnership, limited partnership, or limited liability company—affects who bears risk for debts and lawsuits, how profits are taxed, what your lender requires, and how easily you can admit new investors or transfer interests. Misalignment between your deal terms and your entity documents often creates expensive surprises at closing or after a dispute.

Liability exposure: personal risk vs. entity shield

General partnerships: General partners can be personally liable for partnership obligations. See Tennessee Code Ann. § 61-1-306.

LLCs: A properly formed and maintained Tennessee LLC generally provides limited liability to members and managers for company debts and obligations. See Tennessee Code Ann. § 48-249-114. That protection can be reduced by personal guarantees, direct tortious conduct, commingling funds, inadequate capitalization, or other facts that support veil-piercing. Keeping clean records and separateness helps preserve the shield.

Title, ownership, and transfer mechanics

In a partnership, title can be held in the partnership name, but authority to buy, sell, or encumber may depend on your partnership agreement and default rules. In an LLC, the operating agreement should specify who may sign deeds, mortgages, and leases, and whether member consent is required for major transactions. Lenders and title companies will review governing documents; unclear authority language can delay or derail closings. Align your agreement language with anticipated financing and exits.

Tax treatment and Tennessee franchise/excise considerations

For federal income tax, partnerships and most multi-member LLCs are typically taxed as pass-throughs unless an election is made to be treated as a corporation. Separately, Tennessee imposes franchise and excise taxes on corporations and many limited liability entities doing business in the state (including most LLCs, LPs, and LLPs), subject to exemptions and specific rules. Most sole proprietorships and general partnerships are generally outside the tax unless they elect limited liability or corporate treatment. See the Tennessee Department of Revenue – Franchise & Excise Tax. Coordinate early with tax advisors, especially if you plan special allocations, preferred returns, or tiered structures.

Financing and due-on-sale traps

Transferring property into or among entities can trigger due-on-sale or due-on-transfer clauses. Even transfers of membership or partnership interests may require lender consent under typical loan documents. Many Tennessee commercial lenders also require personal guarantees from principals notwithstanding entity limited liability. Review loan covenants and obtain written consents before restructuring ownership.

Series structures and property segregation

Some investors consider series-style structures to segregate liabilities among properties. Whether this approach fits your goals depends on operational complexity, lender and title company acceptance, and how you intend to syndicate or refinance. Before adopting any series-style structure, confirm Tennessee recognition and recording practices, and align each property’s chain of title, insurance, and financing with the intended liability segregation.

Operating and partnership agreements: provisions that prevent disputes

• Capital contributions and capital calls
• Decision-making authority, consent thresholds, and manager/general partner powers
• Distributions and waterfalls (including preferred returns)
• Admission/removal of members or partners; transfer restrictions and buy-sell rights
• Deadlock and dispute resolution mechanisms
• Indemnification and limitations of liability consistent with law
• Record-keeping and financial controls; separate bank accounts
• Tax matters (including the partnership representative for entities taxed as partnerships)

Clear drafting reduces risks of unauthorized conveyances, mechanics’ lien disputes, and fights over sale proceeds.

Common real estate pitfalls to avoid

• Holding title in individual names before forming the entity, then encountering lender consent issues or potential transfer/recording taxes or fees on conveyance
• Failing to provide written authority resolutions for closings, causing last-minute escrow delays
• Overlooking foreign registration when an out-of-state entity owns Tennessee property
• Ignoring Tennessee franchise/excise tax implications of federal check-the-box elections
• Using a one-size-fits-all operating or partnership agreement that conflicts with syndicated deal terms or lender requirements
• Not documenting capital contributions, leading to disputes over profit splits on sale
• Assuming an entity shield negates personal guarantees or personal tort liability
• Commingling entity and personal funds, weakening liability protection

Tips for Tennessee real estate investors

Checklist before closing

Formation and maintenance basics in Tennessee

To form a Tennessee LLC, file the required formation documents with the Tennessee Secretary of State and maintain a registered agent. Partnerships may arise by agreement or conduct without filings, but limited partnerships and certain elections require filings. Keep your entity in good standing, maintain separate bank accounts, adopt and follow a written operating or partnership agreement, and update authority certificates before major transactions. If your entity is formed elsewhere, verify whether you must register to do business in Tennessee before acquiring or operating property.

Choosing between a partnership and an LLC for your deal

If you prioritize liability protection, flexible governance, and investor familiarity, an LLC is often the default for Tennessee real estate. Partnerships may suit specific tax allocations or legacy structures but can expose general partners to personal liability absent careful planning. The right answer depends on your financing terms, investor base, tax objectives, and exit strategy.

FAQ

Do single-member LLCs get limited liability in Tennessee?

Yes, Tennessee law provides limited liability to members and managers of properly formed and maintained LLCs, including single-member LLCs, subject to exceptions such as personal guarantees or veil-piercing factors.

Will transferring my rental into an LLC trigger my loan’s due-on-sale clause?

It can, depending on your loan documents. Obtain lender consent before any deed transfer or equity transfer that could be treated as an indirect transfer.

Are general partnerships subject to Tennessee franchise and excise tax?

Generally no, unless they elect limited liability or corporate treatment. Many LLCs, LPs, and LLPs are subject to the taxes. Consult a tax advisor for your facts.

Can an operating agreement limit a manager’s personal liability?

It can provide indemnification and limit certain liabilities, but it cannot eliminate liability for personal torts, bad faith, or statutory prohibitions.

Practical next steps

• Map your investment plan: hold, renovate, develop, or flip
• Confirm lender and title company requirements before finalizing your structure
• Draft or update your operating/partnership agreement to match the deal model
• Address authority, transfer restrictions, and exit mechanics clearly
• Coordinate with Tennessee tax and real estate counsel on franchise/excise and transfer implications
• Keep clean records and observe separateness to preserve liability protection

Speak with Tennessee real estate counsel about your entity and deal structure

Legal disclaimer: This blog is for general informational purposes only and is not legal or tax advice. Reading it does not create an attorney-client relationship. Consult qualified Tennessee counsel about your specific facts.