What Is An LLC Operating Agreement?
Operating Agreements are internal documents containing the terms and conditions LLC owners, called members, have agreed upon. These documents provide information about the LLC and its members and describe in great detail how the company that uses them should operate.
Does Tennessee require all LLCs to have an Operating Agreement?
Tennessee does not require LLCs to file Operating Agreements. Title 48 of the Tennessee Code, however, urges them to create and enforce the document. Having an Operating Agreement ensures that Tennessee LLCs will be able to function properly.
In fact, single-member LLCs, in particular, should create an Operating Agreement to formally separate the member from the company and allow for better control over the business.
What Are The Advantages Of An Operating Agreement In Tennessee?
An Operating Agreement provides an LLC with many benefits that will make doing business easier and more profitable. Here’s a quick look:
It keeps members in line
An LLC’s members need to constantly abide by the rules and regulations indicated in the Operating Agreement they signed. Those who intentionally and maliciously violate the terms and conditions specified in it can be legally pursued in court. This helps you hold all LLC members accountable for every action.
It allows you to bypass state laws for LLCs
An Operating Agreement allows you to override Tennessee’s default rules for LLCs so you can run your business according to your preference. While running your company according to the state’s rules won’t put you at a disadvantage, being able to create your own rules lets you run your business easier.
It protects your personal assets
An Operating Agreement reinforces your limited liability status by formally separating you from your LLC. This means that if your company gets sued for valid reasons and loses in court, you cannot be forced to pay for your business’s obligations. Your personal properties and belongings won’t be at risk here.
It provides you with business-critical information
Your Operating Agreement contains all the information and guidelines necessary for daily operations. With the document in place, you won’t have to try to guess what your goals are and what you need to do to achieve them. This will help you streamline your processes and also direct you where you need to go.
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What Are The Limitations Of An Operating Agreement In Tennessee?
Although Operating Agreements are very beneficial, they also have limitations that you must consider in order to maximize their use. Here’s what you need to know:
They do not have control over everything
While a comprehensive Operating Agreement is able to provide guidelines and instructions for almost every aspect of your business, it can only help you prepare for situations you can think of. It does not have any control over unforeseen circumstances and cannot control external factors such as the lack of customer demand and extreme weather conditions.
They cannot prevent all disputes
The detailed instructions included in your Operating Agreement can dispel confusion and minimize the risk of conflicts in your LLC. However, the document cannot completely prevent all disputes from arising. External variables, as well as human factors, can still cause conflicts.
They are not easy to make
It’s not easy to make a comprehensive Operating Agreement that covers all the bases. You need to do a lot of research to know what to put in the document. You will also need to brainstorm and consider all possible scenarios your business might face so you can create provisions for them. The task can become so challenging that hiring a lawyer just might be the only effective option for you.
What Should You Include In A Tennessee LLC Operating Agreement?
Your Operating Agreement must contain all the details about your LLC and its internal processes. This means it should have information about your company and its members, your business purposes, and guidelines or instructions for every process involved in your LLC.
How To Form An Operating Agreement
Before working on your Operating Agreement, make sure to read up on the best practices for LLCs in your industry in Tennessee. Read Title 48 of the Tennessee Code as well to understand the state’s default laws for companies like yours, and use these as the basis for the provisions in your document.
After that, you can proceed to create your own Operating Agreement by following the tips outlined below. You can also get legal counsel if the task becomes too difficult for you.
Your LLC’s information
Start by providing details identifying your LLC, particularly its name and registered business address. Also, include details about your registered agent so that everyone knows the person receiving legal documents on your behalf.
Purposes and goals
Next, specify the purposes for your LLC’s formation in the state. These will serve as your company’s mission and vision statements and will give your business a direction and goal to work for. This is important because it will remind you why you run your business.
In this section, you need to provide information about the members of your LLC, particularly your names and addresses. You must also specify the amounts they gave as capital contributions for your LLC and the respective interest percentages you all have.
After that, you need to include guidelines for various concerns related to your LLC’s membership. These should provide instructions for adding new members, transferring a member’s interest percentage, and withdrawing one’s membership from your company. This part should specify the consequences of withdrawing from the LLC.
Here, you must specify how your LLC will be managed. There are two kinds of management structures for LLCs, and the roles of each member will be affected depending on what you choose.
If your LLC is member-managed, it means the members are the ones personally running the business. They take on active roles and are directly involved in the company’s daily operations and decision-making.
On the other hand, if your LLC is manager-managed, it means it is run by a person the members have appointed for the task. The manager is not necessarily a member of the company, but they have been given full authority over the business’s daily operations. Major decisions will be left to the members, however.
After that, you must provide a detailed description of the roles and responsibilities the members will have. This clarifies the responsibilities and expectations given to everyone in your LLC. It also limits the authority that each member has.
Meetings and voting
The members of your LLC need to meet from time to time so they can get updated on the business’s progress. For this, you will need to provide guidelines instructing everyone on how to schedule meetings, reschedule them when necessary, and conduct them. You must also specify how the minutes of these meetings will be taken and presented to every member.
Your LLC’s members also have the right to participate in company-wide decision-making. Everyone can express their approval and disapproval of something via voting, which can be done during meetings or during special voting sessions scheduled for the purpose.
Record-keeping and financial reporting
Your Operating Agreement must contain a detailed description of your LLC’s accounting system. This includes your process of monitoring cash flow, keeping track of financial transactions, and reporting these to your members. You must also specify how your LLC is supposed to be taxed by the IRS and indicate your fiscal year.
Limitation of liability
Your Operating Agreement must formally separate you and your co-members from your LLC. This will limit your liabilities over your company’s obligations and protect your personal assets from lawsuits. Courts will look at the provisions you inserted here and honor them if necessary.
Guidelines for resolving disputes that arise must be included in your Operating Agreement. This will help you defuse tension and bring resolution to arguments and conflicts that happen in your business. This part will also show potential members and investors just how capable your management is when it comes to handling internal problems.
Lastly, your Operating Agreement must provide instructions for properly closing your LLC if it has to be dissolved. There are several reasons why your company can be dissolved, foremost of which is the untimely departure of a member and a court order. If your LLC has to be dissolved, you have to go through a process to make sure your company won’t leave any outstanding debts and obligations to suppliers. Providing instructions for this will help you handle being dissolved.
Why is an operating agreement needed?
Enforceable in Court
The terms outlined in a written LLC operating agreement is usually enforceable in a court of Law.
Opening Bank account
Certain financial institutions require you to produce an operating agreement to verify whether you have “signing power” for the LLC.
If the terms of compensation, roles, and responsibilities are mentioned in the operating agreement, it avoids disputes among LLC members in the future.
Preserve limited liability status
Especially if you are a single-member LLC, having an operating agreement helps ensure your liability status is upheld in court.
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How Much Is A Washington LLC Operating Agreement?
While an Operating Agreement technically costs nothing if you make one yourself, you must expect to spend some money to make sure that it doesn’t have loopholes or missing provisions. Hiring an attorney to help you can cost you between $500 and $2,500, depending on your LLC’s membership size