Tennessee LLC Operating Agreement | A Comprehensive Guide

Steve Bennett
Business Formation Expert  |   Fact Checked by Editorial Team
Last updated: 
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Tennessee Operating Agreement

When forming a Limited Liability Company (LLC) in Tennessee, one of the most critical steps is creating and executing an LLC Operating Agreement. This legally binding document outlines your LLC’s ownership, management, and operational procedures, ensuring that your business runs smoothly and is protected from potential disputes and legal issues. Although only sometimes required by state law, having a well-drafted operating agreement is essential for an LLC. This article will explore the content and importance of an Operating Agreement in Tennessee and discuss its key components.

Webinarcare Editorial Team will help you understand the process of having an operating agreement for your Tennessee business. You must be guided by all the factors gathered in this article.

What is an Operating Agreement?

An operating agreement is a legally binding document that outlines a limited liability company‘s ownership structure, management, and operational procedures (LLC). It governs the internal workings of the LLC and establishes the rights, responsibilities, and obligations of its members (owners) and managers.

This includes details such as rules, regulations, and provisions related to the operation of the LLC. The Operating Agreement serves as a guide for dealing with disagreements, bringing in new members, and managing various situations that may arise while doing business. It delivers clarity and ensures smooth functioning while providing legal protection to businesses.

Although not always required by state law, having a well-drafted operating agreement is essential for an LLC. It helps prevent potential disputes among members, ensures smoother business operations, and provides a clear framework for making decisions and resolving issues. It also helps to establish limited liability protection for the members by demonstrating that the LLC is a separate legal entity with its own rules and procedures.

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Tennessee LLC Operating Agreement Content

An operating agreement is a legal document detailing the LLC’s organizational structure and operational procedures. It includes forming the LLC, members and ownership, distribution of profit and losses, management structure, meetings and voting procedure, limitation of liability and indemnification, dissolving Tennessee business, dispute resolution, and amendments and modification.

Article I: Formation of the LLC

The first step in creating an LLC Operating Agreement is to outline the basic information about your LLC, such as:

  • Name of the LLC: Your LLC’s name must include the words “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.” and comply with the Tennessee LLC naming requirements.
  • Principal Office Address: This is where your LLC’s primary business activities will be conducted.
  • Purpose of the LLC: This section should describe the primary purpose of your LLC and the types of business activities it will engage in.
  • Registered Agent Information: Your Registered Agent is a person or entity designated to receive legal documents on behalf of your LLC. The Registered Agent must have a physical street address in Tennessee. It’s essential to choose a reliable and responsible Tennessee Registered Agent, as failure to receive and respond to legal documents can have serious consequences for you to start a business in Tennessee

You can serve as your Registered Agent, appoint a friend or family member, or hire the Best Tennessee Registered Agent Services. We reviewed some of the services for you to check out if you still don’t have one.

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Article II: Members and Ownership

This section deals with identifying all the members of the LLC and their ownership percentages. It includes details like names, addresses, and contributions of each member. Details about how increases and decreases in membership are also covered in this section.

  • Initial Members: The names and addresses of each initial member should be listed, along with their respective ownership interests.
  • Ownership Interests: This section should detail each member’s ownership interest percentage.
  • Capital Contributions: Each member’s initial capital contribution to the LLC should be documented, along with any additional contributions that may be required.
  • Additional Members: The agreement should outline the process for admitting new members to the LLC and the rights and responsibilities of these new members.
  • Transfer of Membership Interests: The operating agreement should contain provisions governing the transfer of membership interests, including transfer restrictions and the right of first refusal for existing members.
  • Withdrawal of Members: The process and consequences for members who wish to withdraw from the LLC should be clearly defined. In Tennessee, there is a definite guideline on How to Remove a Member from your Tennessee LLC. 

Article III: Distribution of Profits and Losses

This article explains how the LLC profits and losses will be distributed among the members. It can be based on the ownership percentages or a different agreement stipulated by the members. It lays out the process for distribution and any restrictions on those distributions.

  • Allocation of Profits and Losses: The agreement should detail how profits and losses will be allocated among the members, typically based on their own interests.
  • Distributions to Members: The process for distributing profits to members should be outlined, including the timing and manner of distributions.

Article IV: Management Structure

Your LLC Operating Agreement should outline the management structure of your business. This includes

Member-Managed vs. Manager-Managed: You must decide whether your LLC will be managed by its members or appointed managers. This decision will impact the roles and responsibilities of each party.

A Member-Managed LLC is a type of limited liability company (LLC) where the management and day-to-day operations of the business are handled by its members (owners) directly. In a Member-Managed LLC, each member has the authority to make decisions and take actions on behalf of the company, such as entering into contracts, hiring employees, and managing the finances.

This management structure contrasts with a Manager-Managed LLC, where the members appoint one or more managers to oversee the business operations. In a Manager-Managed LLC, the appointed managers have the authority to make decisions and act on behalf of the company. In contrast, the members typically have a more passive role, focusing on high-level decision-making and strategic planning.

Roles and Responsibilities of Members/Managers: The agreement should define the roles and responsibilities of each member or manager, including their duties, decision-making authority, and any limitations on their powers.

Article V: Meetings and Voting Procedures

This article outlines the rules for conducting meetings and voting procedures. It specifies the quorum required for decision-making, how votes are counted, and how members are notified about meetings. It also includes information about special meetings and emergency decisions.

  • Voting Rights and Decision-Making Process: The agreement should outline each member or manager’s voting rights and decision-making for various business matters.
  • Meetings and Notice Requirements: The operating agreement should specify the frequency of meetings, the process for calling special meetings, and the notice requirements for each type of meeting.

Article VI: Limitation of Liability and Indemnification

To protect the personal assets of your LLC’s members and managers, your operating agreement in Tennessee should address the following:

  • Liability of Members/Managers: The agreement should limit the liability of members and managers for the debts and obligations of the LLC, following Tennessee law.
  • Indemnification Provisions: The operating agreement should include provisions for indemnifying members and managers for actions taken on behalf of the LLC, as long as those actions are within the scope of their duties and do not involve gross negligence or willful misconduct.
  • Insurance Requirements: The agreement should specify any insurance requirements for your LLC, such as liability or property insurance. Small business insurance helps safeguard your business from financial losses, legal claims, and other unforeseen events. This protection allows entrepreneurs to focus on growing and sustaining their businesses within the Tennessee economy.

You may check out the Best Small Business Insurance in Tennessee to learn more about business insurance.

Article VII: Record Keeping and Financial Reporting

This article provides details about the record-keeping and financial auditing procedures. It outlines the importance of keeping accurate and comprehensive records of an LLC’s financial transactions. It also specifies the frequency of financial reporting and distribution to the members.

  • Accounting and Recordkeeping: The operating agreement should outline your Tennessee LLC’s accounting methods and recordkeeping requirements. Effective financial management is important for the success of your Tennessee LLC. Establish a reliable accounting system to track income, expenses, and tax obligations. You can manage your finances using spreadsheets, accounting software, or becoming a CPA in Tennessee.
  • Fiscal Year: The agreement should specify the fiscal year for your LLC, which may be either a calendar year or any 12-month period.
  • Tax Treatment and Filing Requirements: The agreement should specify your LLC’s tax treatment and any required filings with the Tennessee tax authorities. You should include the filing of the Tennessee Articles of Organization, annual fees, and other associated fees that need to be filed.

For the initial and final cost for forming your Tennessee LLC, look up the LLC Cost in Tennessee for additional information. 

Article VIII: Dissolution and Winding Up

This section outlines the circumstances under which the LLC may be dissolved, such as a unanimous decision by members, legal issues, bankruptcy, or achieving its purpose. It also includes information about how the LLC’s assets will be liquidated and debts paid upon dissolution.

Events Triggering Dissolution: The agreement should list the events that will trigger the dissolution of your LLC, such as the death or withdrawal of a member, a unanimous vote of the members, or a court order. 

Some common events include:

  • A unanimous vote of the members to dissolve the business.
  • The death, resignation, or withdrawal of a member unless the remaining members agree to continue the business.
  • The expiration of a specified period or the completion of a specific purpose, as outlined in the operating agreement.
  • A court order mandating the dissolution of the LLC.

Winding Up Process: The operating agreement should outline the process for winding up the affairs of the LLC, which typically involves:

  • Settling the company’s outstanding debts and obligations.
  • Liquidating the company’s assets.
  • Resolving any pending legal disputes.
  • Preparing and filing final tax returns.

Distribution of Assets: The operating agreement should specify how the LLC’s remaining assets will be distributed among the members upon dissolution, typically in proportion to their ownership interests.

Certificate of Cancellation: After the winding-up process is completed, the LLC may be required to file a certificate of cancellation or articles of dissolution with the Tennessee Secretary of State to dissolve the company and remove it from its records formally. 

Article IX: Dispute Resolution

This article provides the protocol for handling any disputes arising between LLC members. It can include stipulations for mediation or arbitration in case of any conflicts. The agreement should include a process for resolving member disputes, such as mediation or arbitration.

Article X: Amendments and Modifications

Your LLC Operating Agreement in Tennessee should include a process for making amendments and modifications, such as:

  • Process for Amending the Operating Agreement: The agreement should outline the process for proposing, considering, and approving amendments to the operating agreement.
  • Required Approval for Amendments: The agreement should specify the percentage of member approval required to amend the operating agreement.

Once your LLC Operating Agreement has been drafted, it should be executed by the initial members or managers and adopted by any additional members who join the LLC.

Role of Registered Agent in LLC Operating Agreement

A Registered Agent is a person or entity designated to receive legal documents and official correspondence on behalf of an LLC. While the primary role of a Registered Agent is to maintain a reliable point of contact for legal matters, some registered agent service providers also offer additional services, such as creating an operating agreement for your LLC. Below are some advantages of having a Registered Agent create an operating agreement for your business:

  • Expertise: A Registered Agent specializing in LLC Formation Services often has extensive knowledge and experience drafting operating agreements. They are familiar with the requirements and best practices for creating a comprehensive and legally compliant operating agreement, which can help protect your business interests and minimize potential disputes among members.
  • State-Specific Requirements: A Registered Agent offering operating agreement services is well-versed in state-specific laws and regulations governing LLCs. They can ensure that your operating agreement complies with the specific requirements of the state in which your LLC is formed, including mandatory provisions and filing requirements.
  • Time-Saving: Drafting an operating agreement in Tennessee can be complex and time-consuming, especially for business owners unfamiliar with legal terminology and procedures. By delegating this task to a Registered Agent, you can save time and focus on other crucial aspects of your business.
  • Customization: A Registered Agent with experience creating operating agreements can tailor the document to meet your business’s unique needs and circumstances. They can help you address specific management structures, financial arrangements, and other critical aspects of your LLC that may not be covered in a generic operating agreement template.
  • Ongoing Support: The Registered Agent services provide ongoing support and guidance in maintaining and updating your operating agreement as your business grows and evolves. This can help ensure that your operating agreement remains relevant and compliant with changing laws and regulations.

While there are advantages to having a Registered Agent create an operating agreement for your LLC, it is essential to carefully review and understand the terms of the agreement before signing. Additionally, it is a good idea to consult with legal and tax professionals to ensure that the operating agreement aligns with your business goals and complies with all applicable laws and regulations.

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FAQs

What is an LLC Operating Agreement in Tennessee?
An LLC Operating Agreement in Tennessee is a legal document that outlines the financial and functional decisions made by a limited liability company (LLC).
Why is an LLC Operating Agreement important in Tennessee?
An LLC Operating Agreement is important in Tennessee because it helps govern and protect the LLC and its members in case of disputes, conflicts, or legal issues.
Is an LLC Operating Agreement required in Tennessee?
An LLC Operating Agreement is not required in Tennessee unless the LLC is a multi-member one.
Can single-member LLCs in Tennessee have an LLC Operating Agreement?
Yes, single-member LLCs in Tennessee can have an LLC Operating Agreement.
What should be included in an LLC Operating Agreement for a Tennessee LLC?
Some important provisions that should be included in an LLC Operating Agreement for a Tennessee LLC include ownership structure, voting rights, profit and loss sharing, distribution of assets, dissolution, dispute resolution protocol, etc.
Should an LLC Operating Agreement be written or oral in Tennessee?
Although Tennessee allows verbal agreements, an LLC Operating Agreement, if agreed upon verbally, would be challenging to enforce in court.
Are LLC Operating Agreements filed in Tennessee?
LLC Operating Agreements are not filed in Tennessee as they are usually considered internal documents.
How do I create an LLC Operating Agreement in Tennessee?
You can create an LLC Operating Agreement by downloading a template and tailoring it to your needs or consulting with an attorney in Tennessee.
Can I change an LLC Operating Agreement in Tennessee?
Yes, an LLC Operating Agreement in Tennessee can be changed if all the LLC members agree to the changes.
Is it essential to update an LLC Operating Agreement in Tennessee?
It is crucial to update an LLC Operating Agreement in Tennessee if there are changes to the LLC members, business structure, or any legal updates.
Can I dissolve an LLC using an LLC Operating Agreement in Tennessee?
Yes, an LLC Operating Agreement can have a provision to dissolve an LLC, but additional legal procedures are required in Tennessee.
Can an LLC member transfer their ownership among themselves in Tennessee using an Operating Agreement?
Yes, an LLC Operating Agreement in Tennessee can have provisions that allow an LLC member to transfer ownership to other members in certain circumstances.
How many members are needed to form an LLC in Tennessee?
A Single-member and multi-member LLCs in Tennessee are allowed, and so, there is no minimum number of members required for forming an LLC.
Can an LLC be formed without any members in Tennessee?
No, an LLC needs at least one member to be established in Tennessee.
Can a foreign-registered LLC operate in Tennessee without an LLC Operating Agreement?
No, a foreign-registered LLC needs an LLC Operating Agreement to operate in Tennessee.
What is the average cost of drafting an LLC Operating Agreement in Tennessee?
The cost of drafting an LLC Operating Agreement in Tennessee may vary depending on the complexity of the agreement and the attorney you hire.
What are the benefits of discussing an LLC Operating Agreement with an attorney in Tennessee?
Seeking legal advice from an attorney before drafting or executing an LLC Operating Agreement can help identify potential legal issues and ensure protection to members.
Can amendments be made to an LLC Operating Agreement in Tennessee supersede state laws?
No, if an amendment to an LLC Operating Agreement in Tennessee conflicts with state laws, the state laws will prevail.
What is an LLC dissolution in Tennessee?
An LLC dissolution in Tennessee is a legal process that occurs when an LLC cease operations and shut down.
Can an LLC Operating Agreement address tax matters in Tennessee?
Yes, an LLC Operating Agreement in Tennessee can include provisions related to paying taxes and other tax-related matters.
In Tennessee, what does it mean to convert an LLC to a different business structure?
In Tennessee, converting an LLC to a different business structure involves re-gistering your LLC’s state legal formation documents in Tennessee while becoming any other type of legalized formation such as S-Corporations, C-Corporations, Partnership entity, etc.
What makes Tennessee’s LLC Operating Agreements different from other states?
Tennessee’s LLC regulation focuses heavily on clarifying the difference between member-meetings structure meeting layout for legalities and situations.
Is it easy to find LLC attorneys in Tennessee specializing in LLC Operating Agreements?
There are many LLC attorneys living and working in Tennessee specializing in LLC Operating Agreements, making it easy to find one who meets your needs.
How soon should an LLC Operating Agreement be created in Tennessee?
An LLC Operating Agreement in Tennessee should be created as early as possible, mainly to establish agreements among the members and formulating the LLC business.
Is an LLC Operating Agreement necessary if I’m the only LLC member?
Yes, an LLC even if it’s the only member requires an LLC Operating Agreement setting out at least the most Basics for the LLC to be create and fully clarified as to what intentions are.
How are LLC assets handled in Tennessee when the LLC Operating Agreement does not specify?
If the LLC operating agreement does not specify reserve split obligations, distributing assets, or any other similar things, the LLC assets are distributed equally among all members in Tennessee.
What happens if you choose not to file changes to your LLC Operating Agreement in Tennessee?
Failing to file any changes, amendments, etc., at worst, leads to a breach of contractual obligations and at an administrative level may cause issues such as legal prosecutions.
How long is an LLC Operating Agreement own in Tennessee?
An LLC Operating Agreement does not expire, and it stays effective during the life of an LLC unless things haven’t mentioned in original agreements arise or specifications change or operate fail, etc.
What is an LLC operating agreement in Tennessee?
An LLC operating agreement in Tennessee is a legal document that sets out the rules and procedures that govern the operations of a Tennessee LLC.
Do I need an LLC operating agreement in Tennessee?
While a Tennessee LLC operating agreement is not legally required, it is strongly recommended for all LLCs operating in Tennessee.
What information should be included in an LLC operating agreement in Tennessee?
A Tennessee LLC operating agreement should cover topics such as member voting rights, profit distribution, management structure, and dispute resolution procedures.
How do I create an LLC operating agreement in Tennessee?
An LLC operating agreement in Tennessee can be created by consulting with an attorney or by using a customizable template.
Can I amend an LLC operating agreement in Tennessee?
Yes, an LLC operating agreement in Tennessee can be amended as necessary, with the approval of all affected members.
Is an LLC operating agreement in Tennessee legally binding?
Yes, an LLC operating agreement in Tennessee is legally binding, and members of the LLC must follow the rules and procedures defined in the agreement.
How long does an LLC operating agreement in Tennessee last?
An LLC operating agreement in Tennessee does not have an expiration date, and is meant to govern the LLC for the duration of its existence.
Is a handshake agreement enough for an LLC in Tennessee?
A handshake agreement may be sufficient to get an LLC started, but it is strongly advised to create a formal operating agreement as soon as possible.
Can a single-member LLC in Tennessee have an operating agreement?
Yes, even a single-member LLC in Tennessee can have an operating agreement, which can be helpful in clarifying roles and obligations.
What is the importance of an LLC operating agreement for multi-member LLCs in Tennessee?
For an LLC with multiple members in Tennessee, an operating agreement is particularly important to make sure that all members are on the same page regarding financial and operational matters.
Is an LLC operating agreement publicly available in Tennessee?
An LLC operating agreement is generally not publicly available in Tennessee, as it is a private legal document between members of the LLC.
Can an LLC operating agreement in Tennessee be disputed in court?
Yes, if there is a dispute regarding the terms of an LLC operating agreement in Tennessee, it can be settled in court.
Do all members of an LLC in Tennessee need to sign the operating agreement?
Yes, all members of an LLC in Tennessee should sign the operating agreement to show their agreement to its terms.
Should I use a lawyer to create an operating agreement for my Tennessee LLC?
It is recommended to use a lawyer to ensure our LLC operating agreement in Tennessee is legal and covers all necessary topics.
Can I include non-compete clauses in my Tennessee LLC operating agreement?
Yes, a Tennessee LLC operating agreement can include non-compete clauses and other similar provisions to protect the interests of the LLC and its members.
Can I keep my LLC operating agreement in Tennessee confidential?
Yes, a Tennessee LLC operating agreement can be kept confidential between members of the LLC and their lawyers.
Can I have a standard LLC operating agreement in Tennessee, or does it need to be custom-made?
While there are standard LLC operating agreement templates available for purchase online, it is generally recommended to consult with a lawyer to make sure your agreement addresses all pertinent issues.
Can an LLC operating agreement in Tennessee be changed after the formation of the LLC?
Yes, an LLC operating agreement in Tennessee can be changed after the formation of the LLC with the approval of all members.
Can a member of my LLC be added to the operating agreement after its creation?
Yes, a Tennessee LLC operating agreement can be amended to add new members as necessary.
What is the procedure for amending an LLC operating agreement in Tennessee?
To amend an LLC operating agreement in Tennessee, all affected members must agree to the proposed changes and the amended agreement should be signed and dated by all members.
Are LLC operating agreement details confidential in Tennessee?
A Tennessee LLC operating agreement is considered a private legal document and is kept confidential among the LLC members and their lawyers.
Can a written LLC operating agreement be mandatory in Tennessee?
While a written LLC operating agreement is not required in Tennessee, it is highly recommended for all LLCs to avoid disputes and facilitate smooth operations.
How binding is an LLC operating agreement in Tennessee?
An LLC operating agreement in Tennessee is legally binding and governs the relationship of LLC members.
Do I need a Tennessee Lawyer to Protect the Terms of my LLC Operating Agreement?
It is wise to seek advice from a Tennessee lawyer when drafting and generating an LLC operating agreement in order to ensure everything is in compliance.
What happens if a member passes away without an operating agreement in Tennessee?
If a member of an LLC in Tennessee passes without a relevant operating agreement, the automatic provisions of the Tennessee Limited Liability Company Act should apply.
What rights do members have if a written agreement is not executed at LLC formation?
Members may refer to the current State Operative Agreement set forth by Tennessee law to interpret the LLC lacks authority with their operating agreement.
Can a Tennessee LLC Operating Agreement impose transfer or ownership interest transfer restrictions?
Yes, LLC Operating Agreements in Tennessee may include provisions that fulfill restrictions and rights relating to ownership interest transfers.

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Conclusion

Having a well-drafted LLC Operating Agreement in place is crucial for the success and protection of your Tennessee LLC. It provides a clear framework for the ownership, management, and operation of your business, helping to prevent disputes and ensure compliance with state law. It is highly recommended to consult with legal and tax professionals when drafting and executing your operating agreement to ensure it meets your specific needs and complies with all applicable laws and regulations.

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