Tennessee LLC Operating Agreement: What to Include

A Tennessee LLC operating agreement is the internal rulebook for how your business operates. Unlike your Articles of Organization, which you file with the Tennessee Secretary of State, an operating agreement stays internal. It dictates how members make decisions, how profits are distributed, how the business is managed, and what happens if someone wants to leave or the LLC dissolves.

Tennessee law does not require you to have a written operating agreement, but this is exactly why you need one. Without a clear written agreement, Tennessee's default LLC rules apply, which may not reflect how you and your co-owners actually want to run the business. A homemade or borrowed agreement is better than nothing, but a well-drafted agreement specific to your situation prevents disputes down the road.

Why a Tennessee Operating Agreement Matters

Tennessee Code Annotated (T.C.A.) Title 48, Chapter 249 governs LLCs in the state. The law is fairly flexible, but it provides default rules that assume equal ownership and equal voting unless you say otherwise. If you and your co-owner have different roles, different capital contributions, or different visions for the business, a written Tennessee operating agreement clarifies those differences up front.

An operating agreement also protects your personal assets. Courts are more likely to respect the LLC's separate legal status when a formal operating agreement exists. Without one, a judge may be more inclined to "pierce the corporate veil" and hold owners personally liable in certain situations.

Finally, banks, lenders, and investors often ask to see your operating agreement. It signals that the LLC is properly structured and professionally managed. Many loan applications and commercial accounts require a copy before they approve you.

Basic Information and Ownership Structure

Start with the fundamentals. Your Tennessee operating agreement should clearly state the LLC's legal name (which must include "Limited Liability Company" or "LLC" per Tennessee requirements), the date of formation, and the state of formation (Tennessee). Include the principal place of business and the mailing address.

List every member by name and address. Specify each member's capital contribution (the money or assets they put into the business) and their ownership percentage. If ownership is not equal, state the exact percentages. This prevents later arguments about "but I thought I owned half." If members contribute at different times or in different amounts, document that as well.

Specify whether the LLC will be member-managed or manager-managed. In a member-managed LLC, all owners can make business decisions. In a manager-managed LLC, only designated managers (who may or may not be members) have decision-making authority. Most small LLCs are member-managed, but if you have passive investors or members who do not want to participate in day-to-day decisions, manager-management clarifies the structure.

Management Authority and Responsibilities

Define what decisions require a vote and what decisions can be made by one person. For example, can the manager sign contracts under a certain dollar amount, or do all contracts need approval from all members? Can the manager hire and fire employees, or does that require a vote?

Specify which decisions require a majority vote versus a unanimous vote. Typical unanimous-vote items include adding new members, selling substantially all assets, dissolving the LLC, and amending the operating agreement. Majority-vote items might include hiring a manager, approving an annual budget, or borrowing above a certain threshold.

If you have a manager, describe the manager's specific duties and authority. Can the manager bind the LLC to contracts? Can they access bank accounts? Can they hire and fire? Can they take a salary, and if so, who decides the amount? Clarity here prevents the "I thought that was my decision" problem later.

Address indemnification: will the LLC cover legal costs and judgments if a manager or member is sued in connection with LLC business? This protects managers who act in good faith on behalf of the business.

Profit and Loss Distribution

Specify how profits and losses will be distributed among members. Under Tennessee law, the default is equal distribution regardless of capital contribution, so if you want something different, you must state it in the operating agreement.

Separate profit distribution from voting power. A member might own 50 percent of the LLC but receive 40 percent of profits if that reflects how the business will actually operate. Be explicit about this.

Address distributions in general: will profits be distributed annually, quarterly, or only when the LLC has cash on hand? Some LLCs retain most profits in the business and distribute only a portion. State that clearly so members understand what to expect.

Note that members will be taxed on their share of LLC profits whether or not the LLC actually distributes the money. A member receiving a "paper profit" without a cash distribution still owes income tax on that profit. Your operating agreement should acknowledge this and probably specify a minimum distribution to cover taxes owed.

Voting Rights and Member Meetings

Define voting rights separately from ownership percentages if needed. For example, each member might have one vote regardless of ownership percentage, or voting might be proportional to ownership.

Specify how often members will meet (annually, quarterly, or as needed) and how meetings are called. Can a meeting happen by phone or video, or must it be in person? What constitutes a quorum? How many votes are needed to pass a resolution?

Address notice requirements: how much advance notice must be given before a member meeting, and what information must be included in the notice? Tennessee law does not mandate specific notice periods for member-managed LLCs, so your operating agreement fills that gap.

Decide whether decisions can be made by written consent instead of an actual meeting. Many LLCs approve decisions by email or written agreement without holding a formal meeting, and your operating agreement should allow for this if it fits your situation.

Transfer of Membership and New Members

Specify whether a member can sell or transfer their membership interest, and if so, under what conditions. Can they sell to anyone, or only with the approval of other members? Must they offer their share to other members first at a fair price?

Address what happens if a member wants to leave: Do they have to sell their share, or can they simply withdraw? What is the buyout formula? Fair market value? A multiple of earnings? A fixed price? Without a clear formula, disputes are inevitable.

Decide whether transferring a membership interest also transfers voting rights and management authority, or whether it only transfers the economic interest (right to profits). Under Tennessee law, a transferee does not automatically become a member or gain voting rights unless the operating agreement provides for it. Clarity here prevents misunderstandings.

Address how new members are admitted. Must all existing members agree, or can a majority decide? What is the process? Is there a capital contribution requirement?

Dissolution and Wind-Up

Specify what triggers dissolution: is it voluntary (members vote to dissolve), does it happen automatically if membership falls below a certain level, or are there other triggering events? Tennessee law permits an LLC to continue even if a member leaves, but your agreement can establish different rules.

Define the wind-up process. Who has authority to wind up the business? In what order are creditors, members, and other stakeholders paid? How are assets distributed? How long does the LLC have to finalize affairs after dissolution?

Address whether the LLC will be dissolved and liquidated, or whether the remaining members can choose to continue the business. This decision can be crucial for members and for continuity.

Amendments and Modifications

Specify how the operating agreement can be amended. Do all members have to agree, or can a supermajority approve changes? Can the agreement be amended without amending the Articles of Organization, or do some changes require a formal filing with the Tennessee Secretary of State?

Note that some changes (like adding a new member) may require filings with the state, while others (like changing profit distribution among existing members) do not. Your operating agreement should clarify which is which.

Tax and Accounting Provisions

Address tax matters: Which member or manager is responsible for handling tax reporting and accounting? Will the LLC hire a CPA, or will a member handle it? Who pays for accounting services?

Specify the LLC's tax year (usually the calendar year) and accounting method (cash or accrual). These should be consistent with IRS requirements and any tax elections the LLC has made.

Address tax distributions. As mentioned, members owe tax on their share of profits whether or not they receive cash. Your operating agreement can require the LLC to distribute enough cash each year so members can pay their taxes.

Dispute Resolution and Exits

Consider including a dispute resolution mechanism. Will disagreements be resolved through negotiation, mediation, or arbitration? This can prevent costly litigation between members.

Address what happens if members have an irresolvable conflict. Some agreements include a "shotgun clause" or "buy-sell" provision: if two members cannot agree, one can force the other to either buy their share at a set price or sell their share at that price. This breaks deadlocks efficiently.

Important Disclaimers and Final Considerations

This guide is informational only and does not constitute legal or tax advice. Tennessee LLC law is complex, and every business is different. Before finalizing your operating agreement, consult with a Tennessee attorney who specializes in business law and a CPA who understands LLC taxation.

Common mistakes include using a generic template without customizing for Tennessee law, failing to address what happens when a member wants to leave, not defining decision-making authority clearly, and neglecting to address tax and accounting responsibilities. Take the time to get this right.

Your Tennessee operating agreement does not have to be filed with the Secretary of State, but keep a signed copy with your business records and give each member a copy. If disputes arise, a clear written agreement is your best protection.

Your Tennessee LLC is now legally separate from you as a person, but only if you follow your operating agreement and maintain the formalities it establishes. Treat it seriously, update it as your business changes, and consult your attorney and CPA before making major decisions. The upfront investment in a solid operating agreement saves money and headaches later.