Tennessee LLC Operating Agreement: Drafting Checklist

Tennessee is one of the best areas to start a business, which is why thousands of owners choose this state as their place of incorporation.[1] However, you must meet certain conditions to register your LLC here and avoid violating state law. 

Besides submitting your articles of organization, you may also wonder: “Do I need to hand in an operating agreement during my business formation?”

We’ll answer your question right here. This article will tell you all you need to know about a Tennessee LLC operating agreement.

Key Takeaways

• You’re not legally required to enter into a Tennessee LLC operating agreement, but having one is highly recommended.

• Drafting an operating agreement helps safeguard against personal liability and lays down the responsibilities of each member.

• You can refer to your operating agreement to resolve disputes, add or remove members, and ensure every member understands their duties.

What Is an LLC Operating Agreement?

Your Tennessee LLC operating agreement is similar to your Articles of Organization. It contains basic information about your limited liability company, such as the name and physical street address of your LLC information. 

But this legal document doesn’t stop there. It also tells how you’ll handle various situations that may arise in your organization, such as adding and removing members. Capital contributions and voting rights of each member are included too. Plus, your agreement should also reveal the responsibilities of your members.

State Requirements

No Limited Liability Company Act in the Tennessee code requires you to draft an operating agreement. It’s also not necessary if you want to remain in good standing with the Tennessee Secretary of State. 

According to the revised Limited Liability Company Act, you have a lot of freedom if you decide to enter into one when it comes to signatories and your timing:

• You can draft your agreement whenever you want, before or after registering your company.

• The LLC can be one of the parties in your agreement.

• Any other holder of financial rights over your enterprise can be included in your operating agreement.[2]

LLC Operating Agreement Benefits

Although having an operating agreement for your business entity isn’t mandatory, this doesn’t mean you shouldn’t draft this document. Not creating one for your LLC is one of the worst pieces of legal advice you can get. Why?

Because you’d miss out on several benefits of this agreement:

Defines Your Limited Liability Status

There are countless perks to setting up an LLC. For example, this business structure can be your Holy Grail to separate personal assets from company property.[3] It prevents authorities from repossessing your personal assets in case of lawsuits or similar scenarios.

But, you must prove your LLC status whenever the state requires you to do so. An operating agreement is an ace up your sleeve in this case. It removes any doubt about whether you truly have an LLC, eliminating the risk of losing private funds.

Helps You Accomplish Business Plan Goals  

Your business plan probably contains a few short-term and long-term goals. It also contains the methods for getting there, and one of the things that can help you realize your vision is to ensure everyone understands their responsibilities.

Your operating agreement lists your responsibilities and those of any other LLC owners. For example, you could be responsible for opening and closing your business bank account, whereas another member may need to file tax forms.

With everyone on the same page and clear about their role, you’re less likely to encounter setbacks on your way to success.

Lowers Future Uncertainty

Let’s assume you’ve formed a family business. You have the highest ownership percentage, with two or three family members with lower capital contributions. What happens if you step down and let someone else lead the enterprise? You need a document that outlines the steps for doing so, and your operating agreement does just that.

By stating who assumes your role in the event of your resignation, you eliminate the need for a family dispute. Furthermore, you can prevent any third parties you bring on board during your business from taking over without your approval.

Who Needs an Operating Agreement?

Tennessee state law doesn’t force any business entity to create an operating agreement. Still, an LLC or any other business formation without an operating agreement is ill-advised. 

You should draft this document, regardless of your place of business or structure:

• LLC

• Corporation

• S corp

• General partnership

Drafting Your Tennessee LLC Operating Agreement

Now that there’s no doubt as to if you should have this paper, let’s see what goes into drafting one. 

Step 1: Provide Business Information

The first part is similar to your Articles of Organization. Here’s what it should contain:

• LLC business name, which includes the term limited liability company or the abbreviation

• Place of business

• Registered agent information

Step 2: List LLC Members

Don’t forget to list your LLC members too. Even if you run a single-member LLC, this section is paramount. It allows you to distinguish your personal assets from your startup funds, eliminating personal liability.

The same goes for multi-member LLCs. All business owners in your agreement should have the following information next to them:

• Ownership interest (membership interest or ownership percentages)

• Member contributions

• Voting rights

Step 3: Decide Member-Managed vs Manager-Managed

The next step is to select your LLC management structure. Again, your pick should be clearly reflected in your operating agreement, whether you have a multi-member or single-member LLC.

There are two main solutions: member management and manager management.

Pros and Cons of Member-Managed LLC

Many business owners manage their LLCs independently without hiring professional managers. If you take this route, you enjoy the ultimate control over your decision-making. You don’t delegate any of your powers or voting rights to a third party, keeping you in the driver’s seat of your enterprise. Plus, the fact that you don’t need to hire others helps you save money.

On the flip side, member management is incredibly time-consuming. The members are in charge of all day-to-day operations. On top of that, you may struggle to attract other business owners under the member-managed model because they don’t want the additional responsibilities.

Pros and Cons of Manager-Managed LLC

Alternatively, you can pay a professional manager. It removes the burden of everyday operations, enabling you to focus on other aspects of your business. Furthermore, this business model is conducive to attracting passive investors.

The biggest drawback of a manager-managed LLC is that managers make decisions on the owner’s behalf, which can undermine the owner’s authority. Also, it’s more expensive than managing a firm on your own.

Step 4: Layout Administrative Operations

After choosing a suitable management structure, you must lay out administrative operations. Your internal document should say who does what in your enterprise. This can depend on several factors, such as capital contributions and voting rights.

But in general, here’s what administrative operations usually include:

• Paying salaries after profit allocation and distributions

• Opening, monitoring, and closing a business bank account

• Making sure your business is on the right track according to your business plan

• Performing annual report-related duties

• Filing income tax and other taxes with the IRS every fiscal year

• Registering your Employer Identification Number (EIN)

• Buying real estate, equipment, stationery, etc.

• Carrying out day-to-day operations

Step 5: Add and Remove Members

You may start as a single-member LLC. But over time, you might recruit new members. Likewise, some members of an LLC might decide to leave your business entity, affecting the membership interest of the remaining members.

All this should be reflected in your internal document:

• What are the ownership percentages of new business owners?

• How does adding a new member influence your voting rights and financial rights?

• How do you address buyout and indemnification concerns?

Create Your Operating Agreement Through a Filing Service

If you want to outsource the drafting process to someone else while you tend to more important duties, Swyft Filings is at your disposal. We take great pride in our LLC filing services, which have effortlessly helped thousands of people start an LLC. Our operating agreement services are especially convenient and affordable, so don’t hesitate to give us a call today.

FAQs

Is an LLC operating agreement required in Tennessee?

An LLC operating agreement isn’t required in Tennessee, but this doesn’t mean you shouldn’t have one. This document gives you peace of mind, knowing it proves your LLC status, protects your personal property, and acts as your go-to managerial resource.

How does an LLC operating agreement help protect my assets?

If you want to enjoy all the benefits of an LLC, you need something that proves your status, such as an LLC operating agreement. It defines your business structure, separating your private assets from enterprise property. You can present it in court to keep authorities from seizing personal funds to resolve a dispute.

Who needs access to an operating agreement once it’s drafted?

Every signatory of your operating agreement must have access to your document once you’ve drafted it. They should be able to refer to it if they’re unclear about their responsibilities, voting rights, ownership percentages, and other critical aspects.

How do I edit information on an operating agreement if membership changes?

Editing information on your operating agreement isn’t as simple as changing a few words. Instead, each member needs to sign off on the amendments. You also have to draft a new agreement that reflects your changes.

What other legal documents do I need to draft for my Tennessee LLC?

Every Tennessee LLC business owner must draft or download a template for their Articles of Organization. The Secretary of State accepts this document if it contains the requested information, including the business name, address, and registered agent details.

Bibliography

1. Tennessee Secretary of State. “Record Number of Companies Registered in Tennessee.” Accessed June 22, 2023.

2. JUSTIA US Law. “2010 Tennessee Code.” Accessed June 22, 2023.

3. Internal Revenue Service. “Limited Liability Company.” Accessed June 22, 2023.