Basic Limited Liability Company (LLC) Set-Up Checklist

A limited liability company (LLC) is a versatile entity, with many operating and tax advantages. Due to the flexible nature of an LLC, along with the relative freedom of the members to contractually agree to varied rights and obligations, the organization of an LLC should be done in a deliberate manner. The attorney or organizer of an LLC, especially a multi-member LLC, should make certain that all parties have a clear understanding of all provisions of the LLC organizational documents and that the intent of the parties is clearly expressed.

For your convenience, the following checklist provides an outline of information about the minimum documentation required for a multi-member LLC. Please note that this checklist focuses on Tennessee limited liability companies organized under the Tennessee Revised Limited Liability Act (the "Act"), however, these principles also apply when drafting and/or negotiating LLC formation in other jurisdictions, including but not limited to, Delaware.

Basic Multi-Member LLC Checklist

  1. Articles of Organization — The articles of organization (the "Articles") is the document that forms and begins the existence of the LLC. In Tennessee, the Articles are filed with the Tennessee Secretary of State and the office of the Register of Deeds in the county of the LCC's principal office. The Act requires that the Articles contain the following information:
    • Name (which must comply with Section 48-249-106 of the Act) and be distinguishable from other corporate names on file with Tennessee Secretary of State
    • Name and address, including county, of the LLC's registered agent (the agent designated by the LLC to accept service of process on its behalf)
    • Address, including county, of the LLC's principal executive office
    • A designation of the LLC as member-managed, manager-managed, or director-managed
    • Number of members, if greater than six
    • Whether the existence of the LLC is to begin upon filing with the Tennessee Secretary of State or at a future date no more than ninety (90) days following filing
    • Duration of the LLC (generally perpetual)
    • If there are to be more than one class of member, a statement to that effect
    • Articles frequently include indemnification provisions for managers/directors
    • Any other provisions not inconsistent with the law
    • Signatures — The articles are to be signed by the organizer of the LLC, who can be any one or more persons.
    • Other information — Articles of Organization may also contain other information (and in some circumstances must contain such information), including but not limited to:
    • If one or more members are to be personally liable for the debts, obligations and liabilities of the LLC, that must be noted with required statutory language.
    • If the LLC is not going to engage in business in Tennessee, a statement that the LLC is prohibited from doing business in Tennessee must be included.
    • Professional Limited Liability Company (PLLC) — If the LLC is professional limited liability company, which is required for certain professions such as medical doctors, dentists and attorneys, it must include:
    • A statement that its purpose is to render specified professional services
    • A statement that the PLLC has one or more qualified persons as members (for example, a licensed medical doctor, dentist or lawyer) and no disqualified persons as members
    • Specific governing information — Many drafters and LLC members prefer to include more specific governing and operating information — including those addressing all rights, duties and obligations of the members of the LLC — in an Operating Agreement, as described below. By law, in the event of any conflict between provisions in the Articles and those in an Operating Agreement, the provisions of the Articles shall control. It is not uncommon to see unfortunate situations where there are conflicts between the provisions of the Articles and the Operating Agreement, so it is imperative that the drafter either keep most governing and operating information in the Operating Agreement (i.e. file "bare bones" Articles) or make very sure that all provisions in both documents are consistent.
  2. Organizer consent or minutes of organizational meeting — It is good practice for the organizer(s) of the LLC to have an organizational meeting or execute an organizational consent whereby the contributions made by the members and the membership interest to be issued to the members are noted, by reference to written contributions agreements (explained below). This document should also note the resignation of the organizer.
  3. Contribution agreements — The agreement or contract between a member or prospective member of an LLC and the LLC, whereby the member promises to contribute to the LLC specified consideration, such as money, goods or services, in exchange for a specified membership interest including class of interest, number of units or percentage of interest, for example. Contribution agreements can be one paragraph long, or dozens of pages long, depending upon the circumstances. If an existing entity is contributing assets of its business to an LLC in exchange for a membership interest, common representations and warranties, and indemnification and other provisions may be required of the contributing party or both parties. The contribution agreement should set forth any payment terms, if the contributors contributions are to be made over time, and membership interest issuance terms (for example, in circumstances where the interest(s) will issue or vest over time). If a contribution agreement is being executed by a new member who is being issued an interest of an existing LLC, the contribution agreement might also note that the new member agrees to be governed by the operating agreement and other organizational documents of the LLC, and require the new member to execute a counter-page to the operating agreement.
  4. Member consent or minutes of member organizational meeting — Member consents or minutes of a member meeting to organize the LLC should include:
    • An acceptance of the organizer's resignation
    • Ratification of all acts taken by the organizer
    • The election of directors, managers and/or officers
    • The members' acceptance of the Articles of Organization and Operating Agreement
    • Other organization matters including designation of the LLC's bank, adoption of any employee benefit plans, etc.
  5. Operating Agreement — The Operating Agreement is a written contract or agreement between members of an LLC. The Operating Agreement will provide the rights, duties and obligations of the members of the LLC. An Operating Agreement, while not required by Tennessee law because any issues not agreed to in writing by the members are governed by the default terms and conditions of the Act, it is advisable, especially where the members intend to take full advantage of the flexible nature of an LLC and agree to operating terms and items that may not be specifically covered by the Act. Items that should or may be addressed in an Operating Agreement include, but are not limited to:
    • General information — In addition to the information already set forth in the Articles, the operating agreement, generally in an Exhibit, Schedule or Addendum that can be updated when interests change, should set forth:
      • The names and addresses of the members
      • Ownership interests (the percentage of ownership, number of units, class of units
      • Whether there are there different shares of membership interest (for example, Class A membership units or interests with governance rights (right to vote) and Class B membership units or interests with financial rights only (no right to vote)
      • The capital contributions made by each member for his/her/its respective membership interests
    • Statement of whether members may be required to contribute additional capital and upon what terms (majority vote of members, unanimous vote of members, determination of manager, directors, etc.), and the consequences of failing to make additional capital contributions (dilution of interest, etc.)
    • Provisions governing loans from members
    • Allocation and distributions — Allocations of profit and loss and distributions of capital, including:
      • Any guaranteed payments, which might include guaranteed payments to one or more members to compensate them for work performed (similar to a salary)
      • Preferred payments (for example, one member or class of members may be entitled to all profit allocated and distributed until some or all of their capital contributions are repaid)
      • Regulatory allocations
      • Distributions quarterly/annually in amount equal to at least the members' estimated quarterly tax payments
    • Management — As stated in the discussion about the Articles of Organization, a Tennessee LLC may be member managed, manager managed or director managed. The Operating Agreement should clearly state which and, depending upon the category of LLC.
    • Member managed
      • Voting decisions – Upon majority vote, super majority vote, unanimous vote. For different things – day to day can be majority, major decisions such as hiring/firing, purchasing property, taking out loan could be by super-majority or unanimous decision
      • Meetings - Who can call, notice of meetings, quorum at meetings, etc.
      • Can voting be by consent, does consent require unanimous consent or just the percentage necessary to pass item
      • Officers, terms of election, appointment and renewal
    • Manager managed
      • Terms of appointment and removal of manager, whether certain major decisions are reserved for member vote or consent, etc.
    • Director managed
      • Run much like a corporation – election of directors, officers, same points on voting as set forth above
    • Services to LLC — Do members, or any member, have obligation to provide full time services or specific services to LLC
    • Member restrictive covenants — Should members be subject to any restrictive covenants such a non-compete, non-solicitation and/or confidentiality provisions, while a member and if membership terminated
    • Conflict of interest provisions — Can the LLC engage in business with a member and upon what type of authorization (majority vote, etc.). An example would be an LLC member or manager causing the LLC to lease commercial real property owned by the LLC member or manager individually
    • Issuance of new interests and preemptive rights — If the LLC needs to issue new, additional, membership units or interests, do the existing members or any class of them have a right to purchase those interests to maintain their equity positions?
    • Tag along/drag along rights — If a majority of membership interests decides to sell to a third party, such majority interest may compel minority interest ("drag along") to sell as well, and the minority interests can compel the sale of their interests as well ("tag along")
    • Put/call options — Does a member have a right to compel the LLC to purchase her membership interest upon certain events (put option) and does the LLC have a right to compel a member to sell her membership interest upon certain conditions (cessation of employment, death, disability, certain amount of time elapsed, etc.)
      • What is the purchase price? Book value? Fair Value? Pre-determined price?
      • Who determines price? Third party appraiser? LLC CPA?
    • Voluntary/involuntary transfer of interests
      • Is it permitted? Under what circumstances?
      • LLC and/or member right of first refusal to purchase on same terms as proposed bona fide third-party purchaser? Or upon other terms?
      • Involuntary transfer — Does an involuntary transfer upon death, bankruptcy, etc. trigger a termination of interest
      • Does an involuntary transfer upon death, bankruptcy, etc. create an option or obligation on part of LLC/other members to purchase the membership interest and/or does member or his/her personal representative have right or option to cause LLC or members to purchase membership interest?
      • What is the purchase price? Book value? Fair Value? Pre-determined price?
      • Who determines price? Third party appraiser? LLC CPA?
    • Termination of interest examples upon
      • Death
      • Disability
      • Withdrawal or retirement
      • Bankruptcy
      • Dissolution if member is an entity
      • Divorce
    • Disposition of terminated interest – purchase price and terms for LLC/member repurchase
    • Events of dissolution of LLC (agreed upon by members, sale of all or substantially all assets, termination of business, etc.)
    • Distributions upon dissolution (to creditors, contingent liabilities, accrued unpaid guaranteed or preferred payments to members, to pay back capital accounts of members, remainder paid pursuant to percentage of financial interest)
    • Governing law
    • Mediation/arbitration clauses
    • Forum selection clause for litigation or arbitration among members
    • Investment representations
    • Miscellaneous other contract provisions common to most contracts

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