"Limited Liability Company Operating Agreement a Tennessee Llc"
A Primer on The Tennessee Revised Limited liability companies guaranteed treatment as a partnership before Jan. 1, 2006 that ﬁle amendments to (“LLCs”) are one of the most popular for federal tax purposes by having four their articles of organization electing to be forms of business entities, especially for characteristics required to be taxed as a governed by the New Act. It is important closely held businesses. This popularity partnership: continuity of life, limited to remember that the Old Act has not is primarily due to the fact that (i) LLCs liability, centralization of management disappeared. The Old Act continues to permit the business to be taxed as a and free transferability of interests. govern all LLCs formed in Tennessee partnership while maintaining a shield of Since 1994, however, the tax laws before Jan. 1, 2006 that do not elect to be liability protection for their members (the governing LLCs have changed somewhat governed by the New Act. owners of the LLC) and (ii) LLCs have dramatically. Now, an LLC simply has The New Act also applies to each greater operational and management to check a box on a tax form to be taxed LLC that is formed in any jurisdiction ﬂexibility than corporations. as a partnership. Although the Old Act other than Tennessee and that qualiﬁes to In 2005, Governor Phil Bredesen was amended to remove some of the transact business in Tennessee on or after signed into law a new act governing tax-driven provisions, it continues to Jan. 1, 2006. A foreign LLC that qualiﬁed LLCs in Tennessee called the Tennessee be a complex statute that is difﬁcult to to transact business in Tennessee prior Revised Limited Liability Company Act navigate and understand. to Jan. 1, 2006 was governed by the Old (the “New Act”), which became effective The Tennessee Bar Association, with Act until the date it ﬁled its 2006 annual on Jan. 1, 2006. This article (i) provides a encouragement from business attorneys report with the Tennessee Department brief summary of the reasons for adoption throughout Tennessee, desired to have a of State, at which time it automatically of the New Act, (ii) explains how the New simpler, shorter, more ﬂexible and more became governed by the New Act. Thus, Act applies to LLCs existing in Tennessee user-friendly statute, without unnecessary the New Act and not the Old Act now prior to 2006 and (iii) outlines a few of the tax-driven provisions. Thus, in 2003 the applies to all foreign LLCs qualiﬁed to do New Act’s key changes from the prior act, Tennessee Bar Association appointed business in Tennessee. the Tennessee Limited Liability Company a committee of experienced attorneys Act (the “Old Act”), which governed from private practice and academia to Key changes from the Old Act LLCs in Tennessee from 1994 until 2006. make recommendations on the potential The following summarizes several implementation of a new, simpliﬁed of the key changes from the Old Act: Why was a new statute governing statute governing LLCs in Tennessee. The (1) New Management Structures. LLCs needed in Tennessee? result of this committee’s work is the New The Old Act contained two possible When the Old Act became law in Act. management structures for LLCs: 1994, it contained numerous, complex member-managed and governor- technical requirements governing the Applicability of the New Act managed. Under the New Act there organization and operation of LLCs. The New Act applies to (i) LLCs are three possible LLC management These provisions were primarily designed formed in Tennessee on or after Jan. 1, structures. The ﬁrst is a member-managed to ensure that a compliant LLC would be 2006 and (ii) LLCs formed in Tennessee structure, in which each of the members 10 Tennessee CPA Journal | MARCH 2008 Limited Liability Company Act by James H. Levine have powers like those of general speciﬁcally for the LLC and that the (9) No Statutory Appraisal Rights. partners of a general partnership. The members not rely on an oral agreement. The New Act contains no statutory second structure is a manager-managed Many attorneys put a provision in the appraisal rights for the holders of structure, in which the members elect articles of organization that speciﬁcally minority membership interests in an LLC managers that have powers similar to provides that any operating agreement in the event of (i) the merger of the LLC, those of general partners of a limited be in writing, which eliminates the (ii) the conversion of the LLC or (iii) the partnership. The third is a director- possibility of an oral agreement, the sale of all or substantially all of the LLC’s managed structure, in which the LLC has contents of which could be easily subject assets. Minority owners who desire to a board of directors and ofﬁcers like a to dispute. seek fair value for their membership corporation. It is important to remember (5) Classiﬁcation of Payment for interests in any of these events must that each of the three management Services. The New Act modiﬁes the now withdraw from the LLC (if not structures may be modiﬁed almost any deﬁnition of “distribution” (T.C.A. § prohibited by the LLC’s articles of way the members desire in the LLC’s 48-249-102(7)) so that payments made to organization or operating agreement) articles of organization and operating a member as compensation for services in order to receive “fair value” for agreement. rendered to the LLC are deemed not to their membership interests (T.C.A. § (2) No “Chief Manager.” The New be distributions. 48-249-503). Act, unlike the Old Act, does not require (6) Buyout Upon Death of a (10) Dissolution. Under the Old an LLC to have an individual acting Member. Unlike the Old Act, the New Act, there are several complex provisions as chief manager. In fact, the concept Act provides default provisions for in which the dissolution of an LLC of having a chief manager at all has the buyout of a deceased member’s could be triggered by the termination disappeared in the New Act. If there is membership interest (T.C.A. of a membership interest (especially to be a chief executive, that person may §48-249-504(b)). The estate of the for LLCs formed prior to July 1, 1999). now be called “president” (which to deceased member can require that the These provisions were designed to most people is a more familiar title for LLC buy the membership interest at its make sure that LLCs would be treated the chief executive of an organization), “fair value,” and the LLC has the option as partnerships for federal tax purposes. “chief manager,” “CEO,” or have any to buy the membership interest at its Under the New Act, the termination of a other title desired by the LLC’s members. “fair value” if the estate of the deceased membership interest never automatically (3) Nonwaivable Provisions. member does not require the LLC to buy triggers the dissolution of an LLC. Under the New Act, drafting of it. “Fair value,” if not agreed on by the (11) Fiduciary Duties. The Old Act operating agreements among the parties, is determined judicially. leaves open the possibility for a court members has become easier. There is (7) Family LLCs. The New Act to create ﬁduciary duties in addition now a single section of the New Act contains default provisions that are to those set forth in the Old Act. The (T.C.A. § 48-249-205) listing 21 items that designed to ensure that members of New Act makes it clear that the only cannot be changed or waived. Every a “family LLC” (one in which at least ﬁduciary duties owed by a member of a other provision in the New Act can be half of the members are from the same member-managed LLC or by a manager altered or waived in the LLC’s articles family) do not have the power or right of a manager-managed LLC are the of organization or operating agreement. to terminate their membership interests statutory duties of loyalty and care. The Essentially, the New Act is a “default (T.C.A. §48-249-503(b)(2)). These directors of a director-managed LLC and statute” except for the 21 nonwaivable provisions, if not overridden in the LLC’s the ofﬁcers of any LLC are held to the provisions. The entire statute applies articles of organization or operating same standards of conduct as directors to an LLC unless a particular waivable agreement, guarantee that LLCs formed and ofﬁcers of corporations under the provision has been modiﬁed or for estate planning purposes qualify Tennessee Business Corporation Act. eliminated in the LLC’s articles of for certain federal gift and estate tax The foregoing list is only meant to organization or operating agreement. It discounts. highlight some of the most signiﬁcant is strongly recommended that every LLC (8) Conversions. Under the New changes from the Old Act to the New have an operating agreement drafted Act, any entity, even those organized Act. There are several other differences, by an experienced attorney to avoid the jurisdictions other than Tennessee, substantive and stylistic, from the Old application of default provisions in the may convert to a Tennessee LLC if the Act. If you are interested in learning New Act that the members would not laws governing the other entity permit more about the New Act or whether want to apply to the LLC. the conversion (T.C.A. § 48-249-703). electing to be governed by the New (4) Operating Agreements Similarly, the New Act permits a Act may be the right decision for your Optional. Under the New Act, an LLC Tennessee LLC to convert to another pre-2006 LLC, you should seek advice is not required to have an operating entity in another jurisdiction if permitted from an attorney experienced in LLCs agreement and the ﬁling of articles of by the laws of the other jurisdiction and business organizations law. organization is all that is needed to (T.C.A. § 48-249-704). Under the Old form an LLC. In addition, oral operating Act, the only permitted conversion was About the Author: agreements are permitted under the New from a Tennessee limited partnership to a James H. (Jim) Levine is a shareholder in the Act. Notwithstanding these changes, it is Tennessee LLC. Chattanooga ofﬁce of Baker, Donelson, Bearman, Caldwell and Berkowitz, P.C. He can be contacted strongly recommended that every LLC at firstname.lastname@example.org. have an operating agreement drafted MARCH 2008 | Tennessee CPA Journal 11