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Operating Agreement For Your LLC In Tennessee
Every owner of an LLC in Tennessee should have an operating agreement to guide the work operations of the business entity.
It is not a legal requirement for an owner of an LLC to have an operating agreement in place. However, having an operating agreement clearly defines the goals of the business entity, rules of operations and increases the credibility your business has to its respective networks.
Why Do You Need an Operating Agreement?
An operating agreement is a document with legal recognition and which states the names of the owners of the LLC and the rules governing the work operations of the LLC.
There are key topical issues that should be addressed in an operating agreement regardless of whether the LLC is made up of a single member or more than one member. Some of the stipulations in an operating agreement may not affect the work operations of a given single-member LLC but are included for legal conformity of the structure of the agreement.
The Organization of the LLC
This part of the operating agreement contains the names of the members of the LLC and also shows how the ownership interests have been divided among the owners.
For multi-member LLC, ownership interest may be divided into an equal rights structure between the owners or individual members can be allotted a given number of “units” of ownership in the LLC.
Management & Voting
This part of the operating agreement will define if the management operations of the LLC will be run in-house by the members or whether an external manager will need to be appointed.
This section of the agreement also allocates voting rights/powers to the members of the LLC and defines how the voting process will be accrued out. Under normal cases, each member is given a single vote. However, some members may receive more voting powers than others.
More information on the management of LLC can be found on our guide Member-Managed vs Manager Managed guide.
Contribution of Capital
This part of the operating agreement captures the amount of capital/monies that have been contributed by each member of the LLC.
Additionally, this section of the agreement is important because it establishes if there is a need to raise extra capital now or in the future and provides for an approach to raise extra capital for the LLC.
Distributions of Profits and Losses among the LLC members
This part of the agreement shows how losses and profits will be shared among the members of the LLC. More often than not, profits and losses are shared at an equal rate among the members of the LLC. If a different sharing method has been adopted by the LLC, the sharing formula for profits and losses among the members should be well captured in this section.
The Structure of the LLC
This section states the method of transferring ownership interests in case one member leaves the business organization.
This section is important in governing the LLC as it addresses future conflicts that may arise when it comes to taking over ownership interests of a member of the business.
Dissolving the LLC
Dissolving of the LLC will occur when the members of the LLC unanimously agree to end the core business operations of the entity.
The provision for a hypothetical process of dissolving the LLC is an important part of the operating agreement.
WHY SHOULD ANYONE IN TENNESSEE HAVE AN OPERATING AGREEMENT FOR AN LLC?
The type of LLC you have formed and registered will not negate the need to have an operating agreement in place. Here are the reasons why you will need an LLC operating agreement:
Recommended by the State – Tennessee Code Section 48-249-203 (a) permits all members of an LLC operating in Tennessee to prepare and enter into an operating agreement to support internal work affairs of the entity.
Helps avoid conflict – An operating agreement is key in setting out the expectations and duties of each member of the LLC to iron out the possible misunderstanding that might crop up in the execution of work mandate by individual members.
Preserves Limited Liability Status of the LLC – An operating agreement will reaffirm the position of the LLC as a limited liability entity in the eyes of the court. Additionally, an operating agreement increases the credibility of the business to its clients and other business partners.
FREQUENTLY ASKED QUESTIONS
Do I require to have an operating agreement?
Yes, you do require to have an operating agreement to assist you to manage work and have control of the business entity especially during modern times of rapid changes in the business environments.
However, you do not have to file a copy of the operating agreement with the state.
When it is right to prepare my operating agreement?
It is a good idea to prepare your operating agreement before filing the Articles of Organization. However, the state does not limit one from creating an operating agreement after the process of formation of the LLC is complete. Also, note that some banks will require you to submit an operating agreement before you can open a bank account for the business.
Do I have to file my operating agreement with the state?
No, you do not need to file a copy of the operating agreement with the state. Operating agreements should be retained by the members of the LLC and there is no need to file an operating agreement with the Tennessee Secretary of State.