BusinessTN

Forming a limited liability company in Tennessee is a little easier this year, thanks to a legislative overhaul that has simplified the state’s complex LLC laws. The new act, which went into effect in January, will allow greater flexibility in how Tennessee’s LLCs are organized and operated and will make the process more comparable to those in other states.

“Many provisions in the old LLC act were drafted to address tax issues that no longer exist,” says Richard Spore, a Memphis attorney at Bass, Berry, & Sims who was a member of the 15-person committee picked by the Tennessee Bar Association to revise the original legislation.

The new legislation, in its simpler, more user-friendly version, has the potential to deter attorneys from establishing LLCs in other states. Before the change, Tennessee LLCs were often first established in other states, such as Delaware, and then authorized to conduct business in Tennessee, says Richard Johnson, a Nashville attorney at Waller, Lansden, Dortch & Davis who was also a member of the redrafting committee. But now out-of-state LLCs will no longer be necessary and both existing and future LLCs will be able to benefit from the new plan.

One of the major changes in the new plan involves a change in management structure. Previously, Tennessee LLCs only had two options—a member-managed structure, which was designed to operate like a general partnership, and a board or director-managed structure, which was designed to operate like a corporation. The new plan establishes a manager-managed structure, says Johnson, which operates more like a limited partnership—all members have limited liability, but one or more of the members is solely charged with managing the business.

“This manager-managed option will be used mainly when an LLC wants to have passive investors as members of the company,” Johnson adds. Another change in the legislation makes it possible for a member to withdraw from the LLC without being penalized. “Not only does the new act grant members the right to withdraw and receive at fair value their interest in the LLC, but it provides a procedure for determining that fair value should that value be contested,” Johnson says.

Also, before January, LLCs were prohibited from having verbal or oral agreements. The new act, however, reverses that order and considers all oral agreements legally binding and enforceable, though Johnson admits that written agreements are still optimal. There’s also a section in the new legislation that enumerates all the nonwaivable provisions. “In the old act, there were things that a company could waive in its operating agreement, and other things that it could not. But those things were scattered throughout the legislation and difficult to find,” says Jim Levine, a Chattanooga attorney with Baker, Donelson, Bearman, Caldwell, & Berkowitz who worked with Johnson and Spore on the redrafting committee. The new act simplifies the process by putting all of those provisions in the same place.

There is also a provision in the new plan that is designed specifically to enhance the use of LLCs by families for estate planning purposes.

A fifth major change involves the legislation’s rules of conversion.

“You used to only be able to convert a Tennessee partnership into a Tennessee LLC, but under the new act, any entity, in or outside of the state, can be converted into a Tennessee LLC and vice versa,” Levine says. This provision will enable a pre-existing LLC more flexibility in where it establish its company and will hopefully bring some of those out-of-state companies back home.

While all new LLCs formed after January will be governed by the new legislation, any LLC that’s already been established by the old laws will continue to be governed by those old laws unless it makes an affirmative action to opt in to the new act, says Nashville-based White & Reasor attorney Van East, another member of the restructuring committee.

The reasons for an existing LLC to opt in vary—there are different rules for different companies and therefore, different advantages, Spore says.

Many of the changes to Tennessee’s LLC laws are technical and might not be readily apparent to your average small business, Spore says, though he does mention that “frequent user” companies, such as real estate agencies that set up new LLCs with each deal, will be greatly affected.

It’s a practical matter for small businesses, Johnson says. “The LLC laws are now very user friendly for general practitioners, which is good for the business community because it allows smaller businesses to work with their regular lawyers. They don’t have to find a lawyer who specializes in the LLC laws of other states.” Clearly, the changes will be important to anyone who is thinking about forming an LLC.

“The greater flexibility and implications of the new act will be beneficial to anyone who wants to set up an LLC from here on out,” East says. “And if you’ve already formed an LLC, it would be worth going to your lawyer to see if there are any new benefits in the legislation that you could take advantage of.”