What is an LLC Operating Agreement?

During the chaos that typically surrounds the early stages of building a business, entrepreneurs may not initially realize the importance of the LLC operating agreement. This document is a binding contract between a company’s LLC members and formalizes important factors involved with the business.

• Outlines how the business will be run
• Details the various roles of owners
• Clarifies specific business operations
• Protects LLC members

Think of it this way, you can liken an LLC operating agreement to a “how-to” guide because it clearly outlines how the business will operate and delineates all expectations of members. This agreement is an internal document kept on file and is not a filing requirement mandated by the Tennessee government, with an exception being if the LLC is overseen by a board of governors.

Why is an Operating Agreement Important for Tennessee LLCs?

Even though the Tennessee government doesn’t mandate an operating agreement, it’s still a good idea for any business forming an LLC in Tennessee to have an agreement in place because it is a good mechanism to customize the LLC members’ wishes and requirements since it organizes them in a formal presentation.

If no agreement is in place, you can potentially face difficult situations down the road. For example:

• Disputes of roles and responsibilities may emerge
• Difficulty dissolving the business relationship if it doesn’t work out
• Defaults to Tennessee LLC-based laws that don’t represent owner preferences if issues emerge
• May face challenges raising capital without a clear structure and governance structure

Key Components of a Tennessee LLC Operating Agreement

One of the greatest advantages of the operating agreement is the fact that it’s not a cookie-cutter document; it’s highly customizable and you can design it in such a way that makes sense for you and your partners.

Aside from basic information, such as the LLC’s name, registered agent, place of business, and date of formation, the following are a few key components most Tennessee LLCs will typically include in their agreements:

• Purpose of the business
• Ownership structure (e.g., percentage of ownership for each individual)
• Member roles, responsibilities, and contributions
• Rules for meetings and voting
• Voting rights and decision-making
• Profit and loss distribution
• Dissolution terms and/or duration of the LLC if not perpetual
• How additions, removals, or transfers in LLC membership are handled
• Procedures for deciding on proposed amendments

Examples of other terms you might want to include in your agreement are whether the LLC is managed by members or a manager. If manager-managed, you can also include how your group plans to select new managers if the need arises. Also, valuable to include are any definitions of terms and phrases frequently used throughout the document, such as members, managers, agents, owners, etc.

How to Create an LLC Operating Agreement in Tennessee

Since you don’t need to formally file your LLC’s operating agreement with Tennessee officiating agencies, creating one is slightly less complex. The primary thing to remember is that crafting an LLC operating agreement should be thoughtfully done with careful attention to detail to ensure your proverbial bases are covered. General steps include:

• Gathering relevant information about the LLC, members, ownership structure, business description/purpose, and other similar details.
• Reviewing Tennessee laws to ensure components are compliant and align with state laws
• Considering the short and long-term goals of the LLC
• Addressing potential scenarios to ensure provisions are established to settle any issues
• Using clear and specific language to ensure all members are on the same page
• Obtaining input from all members
• Reviewing the document upon agreement to double-check provisions

Additionally, you can integrate any terms you want into the agreement, as long as not prohibited by Tennessee law. Adhering to state compliance rules is essential. It is often worthwhile for LLC members to consult with a legal professional to ensure all the important factors are covered.

Tennessee-Specific Considerations

While Tennessee is not stringent with operating agreement requirements, since it doesn’t even require this document to be in writing, it is important for all LLC members to familiarize themselves with the Tennessee Revised LLC Act. While this may or may not directly impact your company, it’s a fairly new piece of legislation that governs how LLCs can be established in Tennessee. 

Generally speaking, the Volunteer State is pretty flexible when it comes to LLC operating agreements. The main thing to remember is to ensure the operating agreement is in 100% compliance with any state regulations. Speaking with an experienced professional who is well-versed in Tennessee law is often a good step to take.

Final Thoughts & Next Steps

An LLC operating agreement is a basic legal document designed prior to the launch of a new business. It sets the conditions on the structure, management, and operational aspects of the newly created LLC.

While not required to be written as a formal document, it’s still a good idea to consider writing one and have all members sign it to ensure everyone is happy with the arrangement and avoids potential future disputes. Having an agreement also offers several tangible benefits, such as potential legal protection, dispute prevention, helps provide an ability to raise funding, and clarifies how taxes will be filed.

If the prospect of creating an LLC operating agreement seems daunting, don’t worry, we’re here to help! To learn more about how we can support your entrepreneurial endeavors, contact us today. Our team will help you write your agreement and/or assist with any other LLC formation steps you need to take to get your new business up and running.

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