Starting an LLC may involve filing articles of organization with the state and establishing internal ground rules for how your business should operate. Establishing your credibility as a legal entity is a part of the plan.
Every LLC in Tennessee is encouraged, but not required, to have an operating agreement to safeguard the company’s operations, from organization to dissolution. It ensures that all LLC members understand their roles and responsibilities. This page guides you in making a Tennessee operating agreement.
On this page, you’ll learn about the following:
Tennessee LLC Operating Agreement Content
An operating agreement is a legal document detailing the LLC’s organizational structure and operational procedures. Topics not restricted to a single member or multi-member LLC will be covered. While these provisions might not influence day-to-day operations, they must be included for legal reasons.
- Ownership: The operating agreement details who the members are and how ownership is divided, be it a sole proprietorship or LLC. Sole proprietorship refers to a single person with total control over a business, also known as a single-member LLC. Multi-member LLC members can have either equal or varying ownership interests.
- Management: Your LLC could be member-managed or manager-managed. The former means members can decide regarding contracts with third parties; the latter means only designated managers can do so. Using “manager-managed” instead of “hands-on” can reduce administrative work. Management’s authority is also limited in the Operating Agreement.
- Voting: Define each owner’s voting rights and voting thresholds, such as a majority vote, supermajority vote, and unanimous consent. A variety of approvals are needed for each type of decision.
- Changes in Membership Structure: If someone leaves the company, how will roles and ownership be transferred? A member buyout and/or replacement procedure must be outlined in the LLC’s governing document.
- Contributions: All types of contributions are accepted. In order to fund their ownership interests, members will have to invest in the collective funds.
- Equity Splits: Determine equity for each member, taking into consideration things like their contributions, responsibilities, and fairness. Maintaining fairness in your equity split will help prevent future disagreements.
- Transfers: You may want to consider outlawing transfers of ownership interests without the consent of all owners. It’s always a good idea to include permitted transfers, such as first refusal, drag-along rights, tag-along rights, and estate planning transfers.
- Business Restrictions: To protect the privacy of the company, including confidentiality obligations. You may also ban the owners from owning competing businesses.
- Intellectual Property: Detail; the ownership of intellectual property created by members. Make sure all company-created intellectual property is owned by the company. You can find alternative ownership/license structures if necessary.
- Taxation: Determine how you will be taxed and plan accordingly. Remember, however, that you must file an LLC annual report and might be required a sales tax.
- Guaranteed Payments: Determine if any of the members should receive Guaranteed Payments, which are like a salary, particularly if your LLC is taxed as a partnership.
- Distribution & Dividends: Explain to all members how the funds will be allocated. A pass-through entity will impose tax distributions regardless of profit distributions.
- Dissolution: The LLC should be dissolved if all members elect to cease operations. It is important to identify how you will end your business in your operating agreement.
Note that the operating agreement, though not a legal requirement in most states, is vital in the operation of your LLC. Should your members have issues with the business, you can deal with it with guidance from the operating agreement.
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Developing an operating agreement could be tedious at times. Besides, since it deals with how your business operates, then it would be best to have professionals help you with it to make sure you get everything right. Getting help from registered agents would be your best bet. Here are three of our best LLC services that can provide you with registered agents to free you of worries:
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Importance of a Tennessee LLC Operating Agreement
Tennessee does not require you to create an operating agreement when you own an LLC. The majority of states require their business entities to draft an operating agreement that allows them to inspect the structure of the business. Tennessee doesn’t need you to take this step. It is possible to form an LLC without penalty fees
This step is essential to ensure that your LLC to be protected from any disputes or misunderstandings. Here are some reasons why LLC members should be required to sign an LLC agreement.
- To safeguard the company Operating agreement: It sets out the rules for LLC. If the members are unable to follow the rules, they will be operated according to the rules of the government. This agreement will save the LLC and provide some additional advantages
- The LLC looks trustworthy: Investors look at the credibility of the business when researching businesses. Operating agreements are an excellent way to ensure that the LLC look professional. It shows that the members care about the company and would like it to comply with all regulations. This helps in growth by attracting more investors.
- The LLC’s status has to be protected: LLCs are well-known for their limited liability status. If the operating agreement clearly defines this and the government is aware of it, they will not be confused. Operating agreements are an opportunity to prove that they’re not the same.
- To resolve any conflicts: In future, there can be some conflicts related to the decisions and distributions. The operating agreement has the processes, requirements, and rules for the members of the company. If they are required to do a job then they should look up the specifics in the agreement before they get on with it.
- LLC flexibility is aided by Limited Liability Companies. Limited Liability Companies are expected to be flexible because it is part of their character. Operating agreements are what allow these LLCs to have such a nature. The freedom of the LLC lies in the confirmation provided by the operating agreement, so it’s pretty important.
- In order to open business accounts, it is necessary for the owner to keep a copy. This is why it’s difficult for a business to open bank accounts if they don’t have an operating agreement.
In order to clearly state the purpose of a business as well as its ownership interests, a written operating agreement is strongly advised in Tennessee.
You and other members of the LLC will be unable to reach any agreements if you do not have an operating agreement. Even worse, your LLC must follow the state’s default operating conditions.
It is required by law in California, New York, Maine, and Missouri, but it is not in Tennessee. Although it is not legally required, creating a written agreement is strongly advised. You may self-notarize and distribute the documents.