A Tennessee LLC Operating Agreement, in simple terms, can be seen as a blueprint for your LLC that offers a clear structure for its operation. Imagine it as a tailor-made guidebook outlining the rules for running your business, including ownership stakes, decision-making procedures, and succession planning.
Under Tennessee's LLC laws, your operating agreement will outline critical aspects such as member roles, decision-making processes, and methods for resolving disputes – creating a roadmap to prevent future misunderstandings.
No, it's not legally required in Tennessee under § 48-249-203. Single-member LLCs need an operating agreement to preserve their corporate veil and to prove ownership. And multi-member LLCs need one to help provide operating guidance, determine voting rights and contributions.
Read on to learn more about Tennessee operating agreements, including:
Here are some key components that are typically included in a Tennessee LLC operating agreement:
In this section, we'll discuss the common provisions and provide sample language for each to help guide you.
By now, you should know the name of your LLC (it's whatever you called it when you filed your LLC formation document with your organizing state). However, you also want to be sure to explain the purpose of your LLC. You don't have to be overly specific. In fact, having a generalized statement allows you to take on new ventures without needing to refile.
OPERATING AGREEMENT of [COMPANY NAME]
This operating agreement is adopted as of [Date] (the “Effective Date”), by [Member’s Name] , an individual and the sole member (the “Member”) of [Company Name] (the “Company”).
The Member hereby adopts this agreement as the operating agreement of the Company, which agreement sets forth the entire understanding of the Member regarding its subject matter and supersedes all prior understandings and agreements regarding its subject matter.
The purpose of the Company is [ Company Purpose] , and the conduct of other activities as may be necessary or appropriate to promote the stated purposes, and to engage in any other lawful business or activity for which a limited liability company may be organized under the Act.
This section is where you indicate if your LLC will be either member or manager-managed. It also outlines the rights and responsibilities of each member, including capital contributions, voting rights, and management structure. Though it may seem unnecessary as the only member, it is crucial for establishing your single-member LLC.
The business and affairs of the Company will be managed by the Member. The vote, action, decision, or consent of the Member will constitute a valid decision of the Member and the Company. The Member may appoint one or more officers (including the Member, if the Member is an individual) who will have such powers and authority to act on behalf of the Company granted to them by the Member.
The business and affairs of the Company will be managed by the manager of the Company and any successor thereto appointed by the Member, which manager may also be referred to as the Company’s president (the “Manager”). The initial Manager will be [Manager Name] , who will serve until the Manager’s death, removal by the Member (for any reason or no reason), or resignation. The Manager will have the right and authority to manage the affairs of the Company and make decisions and take action with respect thereto without further approval or consent of any kind by the Member. Except as otherwise required by this agreement and in lieu of any limitations set forth in [State Name] ’s laws for limited liability companies (the “Act”), the Manager will be solely responsible for and is hereby authorized to manage and operate the business of the Company. Except to the extent that the authority of the Manager is expressly limited by the Member, the vote, action, decision, or consent of the Manager will constitute a valid decision of the Manager and the Company.
A registered agent is the person responsible for receiving and handling essential documents on behalf of your company. Some LLC operating agreements include this information, but it's not strictly necessary because you list this on your formation documents that you file with your organizing state.
The Company’s registered agent in State is: Registered Agent Name , Address . The members may designate other registered agents or offices at any time in this state or, if necessary, in other states.
The "term of an LLC" can be thought of as the lifespan of your Limited Liability Company. It's the intended duration of the LLC, as described in your formation documents. Many business owners create LLCs intending to operate them indefinitely. But you also have the option to specify a fixed period or end date for your LLC.
In most states, LLCs are considered "perpetual" by default, meaning they can exist for as long as you want. Most LLCs in Tennessee choose a perpetual duration.
The duration of the Company will be perpetual.
Capital contributions refer to the funds, property, or services you provide to your LLC to start its operations. It's like the initial investment you make to get your business up and running. For single-member LLCs, capital contributions come entirely from you, the sole owner, granting you the flexibility to decide how much money or assets you want to invest in your business.
Properly documenting your capital contributions is essential for a clear understanding of your business's financial structure and providing necessary information for tax purposes.
The Member’s capital contribution(s) to the capital of the Company for the Member’s membership interest in the Company will be reflected on the books and records of the Company.
The members have made or shall make the contributions of cash, property or services to the LLC as set forth on Exhibit A attached
Indemnification provisions in an LLC's Operating Agreement work as a safety net that protects the company's members from specific costs related to legal issues arising from their work for the company. This means that the LLC will cover any legal fees or damages if a member faces a lawsuit related to their duties for the business.
The agreement should clearly define when and under which circumstances the LLC will provide this protection, as well as any exceptions. Indemnification usually doesn't cover intentional wrongdoing or serious negligence. It's essential to tailor these terms to your business's particular risks, ensuring adequate protection.
The Member, the Manager, the officers, and the organizer of the Company and their respective affiliates, stockholders, members, managers, directors, officers, partners, employees, agents, trustees, and representatives (individually, an “Indemnitee”) will be indemnified by the Company against any and all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative, or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise by reason of the Indemnitee’s status as any of the foregoing, which relates to or arises out of the Company or its assets, business, or affairs, if in each of the foregoing cases (A) the Indemnitee acted in good faith and in a manner the Indemnitee believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful, and (B) the Indemnitee’s conduct did not constitute gross negligence or willful or wanton misconduct. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, will not, of itself, create a presumption that the Indemnitee acted in a manner contrary to that specified in clause (A) or (B) above. Any indemnification under this section 5 will be made only out of the assets of the Company, and the Member will not have any personal liability on account thereof.
Your Tennessee LLC can be taxed as a sole proprietorship, partnership, S corporation, or C corporation. The way your LLC gets taxed depends on the number of members and the tax status your business selects with the IRS.
Your LLC's operating agreement should include sections related to tax status, which discuss your chosen tax status, how you can change it, and how you manage tax returns and allocations (when applicable). This helps your LLC plan for handling business finances, including profits, losses, dividends, and taxes. The goal is to provide a clear roadmap for managing any tax-related issues that may arise in your business.
The Company will be disregarded for federal and state income tax purposes. The admission of one or more additional members, however, will cause the Company to be recognized for tax purposes, and to be taxed, as a partnership.
The Member acknowledges that the Company has elected to be taxed as a corporation for federal tax purposes pursuant to the regulations currently in effect under Section 7701 of the Code, and to be taxed as an electing small business corporation under the provisions of Subchapter S of the Code. Notwithstanding such tax treatment, the Member acknowledges and agrees that the Company will be a limited liability company, for state law purposes, under the provisions of the Act, the Articles of Organization, and this operating agreement.
The Member acknowledges that the Company has filed or will timely file a Form 2553 (Election by a Small Business Corporation) with the Internal Revenue Service and that the election made pursuant to the filing is or will be in force and effect covering all periods since the date of this operating agreement. Except as otherwise provided in this operating agreement, during the term of this operating agreement and the continuation of the Company’s “S” corporation election under Section 1362 of the Internal Revenue Code, no Member shall take any action which would cause the revocation or termination of the Company’s “S” election (under Section 1362(a) of the Internal Revenue Code) and any attempt to take such an action will be null and void and without effect. Without limiting the foregoing, and notwithstanding any provision hereof to the contrary, any transfer or attempt to transfer any membership interest to any of the following will be null, void, and without effect:
(a) a person whose ownership thereof would cause the Company to have a number of Members and assignees of membership interests (shareholders of an “S” corporation) greater than the number permitted by Section 1361(b)(1)(A) of the Internal Revenue Code;
(b) an individual who is not a United States citizen or resident;
(c) a trust (or the trustee thereof) which fails to satisfy the requirements of Section 1361(c)(2)(A) or 1361(d) of the Internal Revenue Code;
(d) a corporation; and
(e)any other entity whose ownership would cause the termination or revocation of the Company’s tax status as an “S” corporation.
Your profit and loss distributions clause simply states when your LLC will distribute its earnings. This may not be essential for single-member LLCs. However, for multi-member LLCs, it's crucial to indicate when, what's required, and how the distributions will happen.
As the sole member of the LLC, the Member is entitled to all profits of the LLC and is responsible for all its losses. Profits and losses shall be determined annually and will be allocated to the Member's capital account. Distributions of cash or other assets will be made at such times and in such amounts as deemed appropriate by the Member.
What do you do when you need to alter any terms in your LLC? It's simple - you follow your LLC amendment clause. For single-member LLCs, this is much simpler. For multi-member LLCs, you'll want to consider voting percentages and required steps to amend the operating agreement carefully.
This agreement and the articles of organization of the Company may not be altered, modified, or changed, and no provision of this agreement may be waived, except by an amendment or waiver, as applicable, approved by the Member.
LLCs, by design, usually are not required to follow corporate formalities. That's usually for corporations. However, in some cases, not observing these formalities might jeopardize upkeeping your corporate veil. Therefore, it's good practice to include a waiver of all formalities in your operating agreement.
The failure of the Company or the Member to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this operating agreement or the laws in the state in which the Company is which govern limited liability companies will not be grounds for imposing personal liability on the Member for liabilities of the Company.
You don't want to think about the worst-case scenario, but it's important to have a plan just in case things don't go as planned. This clause provides guidance on how to dissolve your LLC, and how to assign control of the LLC in instances of your death or incapacitation.
Upon the occurrence of any event which terminates the continued membership of the Member in the Company, the Company will not be dissolved, and the business of the Company will continue. The Member hereby specifically consents to such continuation of the business of the Company upon any such event. The Member’s legal representative, assignee, or successor will automatically become an assignee of the Member’s interest and will automatically become a substitute Member in place of the withdrawn Member.
Your effective date for your operating agreement is the day the agreement goes into effect. Think of it as the day your agreement becomes "official".
Good news! There's no need to file your operating agreement like your Articles of Organization (or Certificate of Formation, depending on your home state). Your operating agreement is an internal document that you keep with your own company's records. Simply sign it and keep a copy so you can always find it when you need it.
As small business owners, we all dream of the day when our business grows too large to handle alone. If you find yourself in that exciting position and are ready to bring another member on board, you'll need to revise the paperwork above. Most likely, you'll need to create an entirely different agreement as an agreement for a multi-member LLC varies from that of a single-member one. Ensure your new agreement aligns with the partners' understanding and expectations about their roles, contributions, and profit distribution.
Having a well-drafted, comprehensive operating agreement will serve as the foundation for your LLC's future success. Remember, when it comes to legal aspects of your entrepreneurial venture, knowledge is power! Happy navigating, and good luck with your enterprise's journey!
