Tennessee LLC Operating Agreement

Why should a Tennessee LLC have an operating agreement?

A Tennessee LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.

According to TN Code § 48-206-101 (2019), only director-managed LLCs (LLCs managed by a board of directors, like in a corporation) are required to have an operating agreement. Most types of LLCs may have an operating agreement but are not required to. Even so, we at Northwest highly recommend adopting a written operating agreement.

1. Your operating agreement proves you own your LLC.

The Tennessee Articles of Organization do not require you to list members’ names and addresses, which is great for keeping your private information off the public record. But it could make it harder to prove to a bank, landlord, or potential investor that you actually own your LLC. For that, you’ll need a written operating agreement with all members’ names and addresses listed.

2. An operating agreement can help reinforce your limited liability status.

To benefit from limited liability status, an LLC has to be able to prove that it is a legally separate entity from its owners. One way to do this is by following the rules and procedures in your operating agreement. If you’re ever served with a lawsuit, you’ll make your attorney’s job much easier if you have a strong operating agreement.

3. An operating agreement can help prevent misunderstandings.

Occasional conflict is bound to arise when people go into business together. Since all your members have already agreed to the rules set out in your operating agreement, it’s a handy document to consult when you can’t agree on a next step.

4. An operating agreement can override Tennessee’s default laws.

In the absence of an operating agreement, your LLC will be subject to Tennessee’s default LLC statutes. These statutes might not work well for your company. A customized operating agreement will give you more freedom in how you run your LLC.

Tennessee Case Law

We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*

“Consider the case of Bridgeforth v Jones, where the failure to adopt an operating agreement opened the door to the inevitable dispute among the members regarding the obligations for capital contributions and the actual amount of ownership interest allocated to the members. Assuming good faith on all parties, the Bridgeforth case is an excellent example of why it is important to plan ahead, discuss potential sticking points, and distill the members’ understanding into a written agreement.

“Had the members taken such steps, this misunderstanding would likely have been avoided, meaning that the resources diverted to the expensive and extensive litigation were used resolving a misunderstanding rather than being used for more fulfilling purposes. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”