Tennessee Operating Agreement

If you’re starting a business and forming a limited liability company (LLC) in Tennessee, it would be wise to have a written operating agreement in your records. Though a member-managed LLC isn’t required to have one, if your LLC is board-managed, you must have an operating agreement.

An operating agreement is significant if your LLC has more than one owner, or member, as it establishes ownership shares, profit and loss distributions, and member roles and responsibilities. 

Why You Need an Operating Agreement

The operating agreement establishes each member’s ownership share in the LLC, profit and loss distribution percentages, and how proceeds will be divided if the business is sold. An operating agreement also defines how decisions and member disputes will be resolved. 

It also defines each member’s role and responsibilities and how the LLC is managed, clarifying who oversees which aspects of LLC operations. 

Without an operating agreement, Tennessee laws will apply by default, and disputes may have to be settled in court, which can have serious negative consequences for the business.

What Should the Tennessee Operating Agreement Include?

Again, the operating agreement will define members’ ownership percentages and how profits and losses are distributed. In Tennessee, your operating agreement must contain a statement of all membership interests in the LLC, which must include:

• Each member’s name and membership interest
• The identity and membership interest of all entities bound by a contribution agreement or contribution allowance agreement
• A description and cash value of each property or service contributed for each membership interest
• The amount, value, and expected receipt time of any future contributions agreed upon by a contribution agreement or contribution allowance agreement
• The rights of any member or the LLC itself to make distributions to members
• A conditional time or event that would cause the LLC’s dissolution

 Those are its required elements, but your operating agreement should also include the following:

Membership Information:

• Each member’s rights and responsibilities: Clearly articulate the duties, obligations, and powers of each member. In Tennessee, unless otherwise specified, all members have an equal right to participate in the management of the LLC.
• Capital contribution requirements for each member: Specify the initial amount or property each member contributes to the LLC and if there are any expected future contributions.
• Procedures for adding and removing members: State the conditions and procedures for member changes, keeping in line with Tennessee statutes which might require majority or unanimous consent for adding members.
• What happens when a member sells their interest, becomes disabled, or dies: In Tennessee, unless stated otherwise, a member’s LLC interest may be assigned but it does not give the assignee the power to participate in management.
• Conditions under which a member might become bankrupt or insolvent: Detail the impact and course of action if a member faces bankruptcy. In many jurisdictions, this can lead to a dissociation event.

Management and Voting:

• Management structure and roles of members: Specify if the LLC will be member-managed or manager-managed. Tennessee law permits both.
• Voting rights of each member: Define if voting will be on a per capita, based on capital contribution, or another basis. Clarify any special voting rights or veto powers.
• Rules for meetings and voting: Set quorum requirements, notice procedures, and any regular meeting schedules.
• Rules for managing potential conflicts of interest among members: Tennessee has fiduciary duty provisions, so ensuring a clear process for managing conflicts is crucial.

Financial Matters:

• Allocation of profits, losses, and distributions: Typically done based on capital contributions, but this can be altered if all members agree.
• Provision for periodic financial audits or reviews: State if and when financial audits are to be done, which can foster transparency.
• Tax treatment of the LLC: Tennessee LLCs usually have pass-through taxation, but members can opt for a different tax classification if beneficial.

Changes and Amendments:

• Process for amending the operating agreement: Clearly state the procedure and any required member vote thresholds.
• Guidelines for company management during transition events: For events like mergers or major acquisitions, provide guidance on management roles and member approvals.
• Conditions under which the LLC might be sold or merged: Outline any specific member voting thresholds and procedures.

Disputes, Legalities, and Policies:

• Clauses for dispute resolution or mediation: It might be wise to keep dispute resolution local, such as mandating a Tennessee-based mediator or arbitrator.
• Guidelines for non-compete and confidentiality agreements: Tennessee has specific enforceability standards for non-compete clauses, so be specific and reasonable.
• Provision for indemnification and limitation of liability: Protect members and managers from certain liabilities, consistent with Tennessee law.

Record Keeping and Communication:

• Details about record keeping requirements: Adhere to Tennessee’s mandates on LLC record-keeping, ensuring members have access to necessary documents.
• Guidelines for how company-related decisions will be documented or communicated: This promotes transparency and ensures all members are informed.

Company Information and Dissolution:

• Description of the business’s purpose and activities: While Tennessee doesn’t mandate an LLC to have a specific purpose, it’s beneficial to state it for clarity.
• Identification of the registered agent and office: A must-have for Tennessee LLCs. Clearly state the designated agent and address for legal notices.
• Procedures for dissolving the LLC: Tennessee has specific steps for dissolution. Ensure the agreement details the process, including member voting requirements and settling of liabilities.
• Procedures for winding down or liquidating the company’s assets: Describe how the LLC’s assets will be liquidated and debts paid upon dissolution.

How to Draft a Tennessee Operating Agreement

You can find operating agreement templates online from services like ZenBusiness, which will ensure the standard legal language and allow you to fill in the blanks. You’ll probably be able to find free templates online as well, but it’s advisable not to use those as they may include errors.  

Consider having an attorney draw up your operating agreement if your business has multiple members. An attorney will ensure that all bases are covered, and all member’s rights are protected. They can also include language that is specific to Tennessee laws. 

This could cost anywhere from $500 to $2,500, but it could save you much more. 

Articles of Organization vs. Operating Agreement

The operating agreement should not be confused with your LLC’s articles of organization. The articles of organization officially form your LLC with the state and include no information about member roles or financial interests. 

Also, the articles of organization are filed with the state and part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed. 

Keep Your Tennessee Operating Agreement Up to Date

It’s a good idea to review your operating agreement periodically. Circumstances change, and the safest approach is to ensure your operating agreement is entirely up to date. Generally, your operating agreement will state that members have to vote to approve amendments to the operating agreement. 

If no procedure is specified, you’ll have to gain a unanimous vote of members to amend your operating agreement.

Don’t Skip the Operating Agreement

You’re likely not required to have an operating agreement in Tennessee, but the wise entrepreneur would never do business without one. It’s a document that could be critical to the future of your business. You may think a dispute will never arise, but times and people change. 

You don’t want to end up in a bitter court battle because you pushed off creating an operating agreement. It’s a document that will protect the rights and interests of your LLC members and ensure smooth, continued operations in the event of any unexpected hurdles or pitfalls.