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The Limited Liability Act in Tennessee

A Limited Liability Company, known as an LLC, operates under state law. According to the Internal Revenue Service, LLCs have limited personal legal responsibility for debts and actions. Membership restrictions, such as the number and type, are not limited. Gov. Phil Bredesen approved the Tennessee Revised Limited Liability Company Act, referred to as the "Old Act," in 2005 in an attempt to simplify the statutes that govern Tennessee LLCs.

  1. Tennessee Limited Liability Company Act

    • Tennessee designed the original laws to guarantee LLCs received benefits as partnerships for tax purposes. These tax laws were plentiful, complicated and difficult to understand. The complexity of filing taxes for LLCs eased between 1994 and 2005 and attorneys felt the language of the limited liability act should follow suit. The Tennessee Bar Association selected a group of qualified attorneys to recommend ways to simplify the language of the act and remove needless tax laws. The recommendations led to 11 significant changes in the Tennessee Limited Liability Company Act, reducing the act from 45 chapters to 10 chapters.

    Management and Title Selection

    • The old act allowed two management structures. Member-managed structures operate with all members contributing to the daily functions of the company. Board-managed LLCs operate with a board of directors and a director who runs the business. Under the new structure, manager-managed, the manager acts as a general partner. The old act labeled the chief manager as "Chief Manager." An LLC can now assign any title to the individual acting as chief manager.

    Nonwaivable Rules and Operating Agreements

    • The new act lists 21 nonwaivable rules that LLCs must follow with no exceptions. LLCs may modify the other provisions to fit the requirements of the company. The new act no longer requires operating agreements, but allows oral operating agreements. The articles of organization suffice to start a LLC.

    Payment Classification and Buyouts

    • The current act changed the classification of "distribution" so member payments for services rendered are not distributions. LLCs can purchase a deceased member's interest at fair value even if the member's estate does not require a fair value buyout. The courts will decide fair value when the member's estate cannot come to an agreement.

    Family LLC

    • Members of a family LLC cannot end their member interest unless stated in the articles of organization or written or verbal operating agreement. In doing this, the new act assures that family LLCs created for estate planning reasons receive certain federal and estate tax benefits. Tennessee defines a family LLC as one where members of the same family hold at least 50 percent of financial interests in the company.

    Conversions and Appraisal Rights

    • LLCs in other jurisdictions may convert to a Tennessee LLC if the other jurisdiction allows the conversion. Correspondingly, Tennessee LLCs can convert to LLCs in another jurisdiction if the jurisdiction allows the conversion. Statutory appraisal rights for minority interest holders are not required upon dissolution of an LLC.

    Dissolution and Fiduciary Duties

    • Termination of membership interest no longer causes the termination of an LLC. Only fiduciary duties owned by members in member-managed or manager-managed LLCs are the required duties of loyalty and care. This means a member must make ethical decisions and act in the best interest of the LLC when carrying out assigned fiduciary duties. The new act only holds a member responsible for his assigned duties in the LLC.

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