How to Form an LLC in Tennessee!

The names of Tennessee LLCs are subject to a few statutory requirements. First, the name must include “limited liability company,” “L.L.C., “LLC,” or one of these 3 in another language (that can be written in Roman characters). The name cannot suggest that the LLC carries out business it is not authorized to, is affiliated with any fraternal, veterans, service, religious, or charitable organization (unless the organization has signed a consent), or imply affiliation with the United States government. The name also must be distinguishable from the name of every other entity formed in Tennessee or registered to do business in Tennessee.

To form an LLC in Tennessee, an organizer must file articles of organization with the Secretary of State. The filing fee for this is $50 per member, with a minimum of $300 and a maximum of $3,000. These articles must include the LLC name, the name and address of the registered agent, the name and address of the organizer(s), if the LLC will be member-managed or board-managed, if any one member will be liable for the debts of the LLC, the number of members of the LLC, and a few other optional provisions based on what powers and restrictions the LLC wishes to give itself.

Tennessee requires that board-managed LLCs have operating agreements, and gives member-managed LLCs the option to have an operating agreement. This agreement, which must be in writing, will regulate the internal and external affairs of the LLC and bind all of the members.

EIN: Multi-member LLCs or LLCs with employees will need to obtain an EIN through the I.R.S. or an incorporation service that provides this service.

Annual Report: Tennessee LLCs must file annual reports with the Secretary of State, along with a filing fee calculated using the same method as the filing fee for the articles of organization ($50/member, minimum $300). This annual report must include the LLC name, the name and address of the registered agent, the street address of the LLC’s principal office, the names and addresses of governors and managers (if any), and an EIN if the LLC has one.

The Tennessee LLC Act gives LLC members contractual freedom to customize their contributions, rights, and distributions of profits and losses.  In addition, it gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties, protects both majority and minority members’ membership interests, and allows members to protect their control of an LLC.

Tennessee Has a Growing Economy

Each year, Tennessee forms over 12,000 new LLCs.  Tennessee has over 54,000 active LLCs.  According to the U.S. Chamber of Commerce, Tennessee ranks second for cost of living and sixth for short-term job growth.

The Tennessee LLC Act gives LLC members contractual freedom to customize their capital contributions and their shares of profits and losses.  Section 304 states that “[a]ny profits and losses of an LLC shall be allocated among the members or holders of financial rights in the manner provided in the LLC documents.”  This gives members contractual flexibility to adapt their income streams and risks of loss to further their broader asset management plans.

Formation

The Act does not require filing of members’ names.  A “person” may form an LLC by filing its articles of organization, and the definition of “person” includes almost any kind of business or legal entity.  An LLC’s members may therefore have an entity or person who is not a member file the LLC’s articles of organization with the Tennessee Secretary of State.

Duration

The Tennessee LLC Act provides for an LLC’s unlimited life.  It states that if the articles of organization do not limit an LLC’s existence to a specific time period, the LLC’s existence is perpetual.  An LLC’s existence can therefore outlive its members’ lifetimes.

Dealing with Business Partners

The Act enables members to create classes of membership.  An LLC agreement may establish classes of membership interests with different rights, powers, and duties, including voting and non-voting interests.  Section 303 states “[t]he LLC documents may provide for classes or groups of directors, managers, members or holders of financial rights having the relative rights, preferences, limitations, powers and duties provided in the LLC documents ….”  This facilitates everything from complex, high-dollar-volume transactions to succession planning in family businesses and estate planning by gifts of non-voting interests.

The Tennessee LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties.  Section 403 establishes limited duties of loyalty and care for members of member-managed LLCs.  Section 205 allows members to narrow the scope of the duty of loyalty, but prohibits them from completely eliminating it.  For example, an LLC agreement may (1) “[i]dentify specific types or categories of activities that do not violate the duty of loyalty …, if not manifestly unreasonable”; and (2) “[s]pecify the number or percentage of members … that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.”  This second element is a “safe harbor” provision for “interested” transactions, which are transactions between an LLC and one or more of its members or managers.  Section 404 contains a similar safe harbor provision.  In addition, Section 205 allows members to narrow, but not unreasonably reduce, the duty of care.

The result is the Act protects both majority and minority members.  It protects minority members because an LLC agreement may not completely eliminate fiduciary duties, even though it may identify activities that do not violate them and prescribe standards for measuring them.  These provisions make minority interests safer investments and therefore more valuable.

The Act protects majority members because it provides a “safe harbor” to facilitate contracts and transactions between an LLC and one or more of its managers or members, or an entity in which they own an interest, if the contracts or transactions meet minimum disclosure, approval, or fairness requirements.  These rules give majority members and the LLC certainty in business planning and the ability to take advantage of mutually beneficial opportunities.

Preventing Unwanted Business Partners

The Tennessee LLC Act allows members to protect their control of an LLC.  It distinguishes between a member’s “governance rights” and “financial rights.”  The Act provides that if a member transfers his or her governance rights, the transferee cannot become a member or exercise the governance rights unless the non-transferring members give unanimous approval.  Sections 501 and 508 state members may “unreasonably” withhold their approval because the decision is in their sole discretion.

If a member transfers his or her financial rights, the transferee receives “only the share of profits and losses and the distributions to which the transferor would otherwise be entitled.”  Section 507 states the transfer of financial rights does not entitle the transferee to exercise any governance rights, become a member, or dissolve the LLC, and “any attempt by the transferee to do any of the foregoing shall be null and void.”

Creditors Only Get Passive Rights, Not Control Rights

In addition, the Act states that a person ceases to be a member of an LLC when the person makes an assignment for the benefit of creditors, files a bankruptcy petition, or fails to contest a petition seeking his or her reorganization, liquidation, dissolution, or similar relief.  § 503.  But “[t]he pledge of, or granting of a security interest, lien or other encumbrance in or against, all or any portion of the membership interest of a member is not a transfer of ownership and shall not cause the member to cease to be a member or to cease to have the power to exercise any rights or powers of a member.”

If a judgment creditor of a member obtains a charging order against the member’s membership interest, “the judgment creditor has only the rights of a transferee.”  Furthermore, a charging order is a judgment creditor’s “sole and exclusive remedy.”

A Tennessee LLC must continuously maintain an agent for service of process in the state.  A commercial registered agent service may act as a Tennessee registered agent.

An unusual aspect of the Tennessee LLC Act is its penalties for failing to obtain a Certificate of Authority for a foreign LLC.  This is sometimes called “qualifying” a foreign LLC to do business in the state.  A foreign LLC is an LLC that is formed under the laws of a state other than Tennessee.

In most states, a foreign LLC may defend itself in state court if it has not qualified to do business in the jurisdiction, but it may not be a plaintiff in state court until it has qualified.  Many states also require a foreign LLC to pay the taxes and fees that it would have paid if it had qualified when it first started doing business in the jurisdiction.  But Tennessee charges a penalty, for each year a foreign LLC did business in Tennessee without being qualified, of three times (3x) the annual filing fee the foreign LLC would have paid if it had qualified.  This can be a steep penalty because the annual filing fee required by section 1007 depends on the number of members in an LLC, and it ranges between $300 and $3,000.  Foreign LLCs should therefore qualify to do business in Tennessee if there is any doubt about their status of “doing business” in Tennessee.

Tennessee is an uncommon case where the disadvantages of forming an LLC may strongly outweigh the advantages of forming a Tennessee LLC. For example, Tennessee’s LLC act is exceptionally long, consisting of over 100 pages of formalities.
Should you wish to have more flexibility and protection, you may instead form a Delaware LLC even if you operate in Tennessee.  What are the advantages of a Delaware LLC?  (Delaware LLC Advantages).  We can then help you file an application for registration to do business in Tennessee with your Delaware LLC (Form Delaware LLC).