On March 1, a federal judge in the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional. The Act, passed in 2021, would require nearly all small business owners to file a Beneficial Ownership Information Report with the Financial Crimes Enforcement Network. But with the ruling, this controversial requirement is on hold.…
When forming a Tennessee Limited Liability Company (LLC), having a well-structured and comprehensive operating agreement is crucial to ensure the security and continuing stability of your enterprise. An operating agreement is a legal document that outlines the internal operations, rights, responsibilities, and decision-making processes of the LLC. An operating agreement is not always legally required…
On March 1, a federal judge in the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional. The Act, passed in 2021, would require nearly all small business owners to file a Beneficial Ownership Information Report with the Financial Crimes Enforcement Network. But with the ruling, this controversial requirement is on hold.…
On March 1, a federal judge in the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional. The Act, passed in 2021, would require nearly all small business owners to file a Beneficial Ownership Information Report with the Financial Crimes Enforcement Network.
But with the ruling, this controversial requirement is on hold. Over 32 million small business owners can breathe a sigh of relief, for now.
What is the Corporate Transparency Act?
The purpose of the Corporate Transparency Act is reportedly to help the federal government fight financial crimes and promote national security. The idea is that by knowing who has created small businesses like LLCs and S-Corporations, it can help law enforcement stop activities like money laundering and financing of terrorism.
The Act began to take effect on January 1, 2024. Most small businesses are required to file a Beneficial Owner Information Report with the FinCEN. The report asks for information such as who the members of an LLC are, who managing or controlling corporate officers are, etc.
Businesses formed prior to January 1, 2024 have until January 1. 2025 to file their reports. Business formed in 2024 have 90 days from the date of formation to do so. After January 1, 2025, businesses will have just 30 days to file.
Failure to can subject business owners to hefty civil and criminal penalties.
Why Was the Act Ruled Unconstitutional?
An association of small business owners filed a lawsuit against the Secretary of the Treasury. The case is titled National Small Business United v. Yellen, Case No. 5:22-cv-1448-LCB.
In the lawsuit, the plaintiffs filed a motion for summary judgment, asking the court to make a ruling without needing a jury. This type of motion is common when there are only legal issues the court needs to address.
In its ruling on the motion for summary judgment, the court found that the Act does not have an enumerated power in the Constitution that authorizes it. Though the court was sympathetic to the idea, it rejected the notion that laws are constitutional just because they have good intentions or are allegedly for a particular purpose.
Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.
What’s Next for the Corporate Transparency Act?
For the time being, the Act is not enforceable as the court has issued an injunction. The exact scope of the injunction is not immediately clear, though (whether it applies to everyone immediately, or just the named parties). The federal government will undoubtedly appeal this decision. The appeal would go to the United States Court of Appeals for the 11th Circuit.
If the feds do appeal, there will be briefing, oral argument, and likely months before the court issues a ruling on whether to affirm or reverse. The Act may still be on hold going into 2025.
Connell Law, PLLC is watching this matter closely and will inform our clients about this decision. Please reach out to us if you have further questions about the Corporate Transparency Act or other small business legal matters.
When forming a Tennessee Limited Liability Company (LLC), having a well-structured and comprehensive operating agreement is crucial to ensure the security and continuing stability of your enterprise. An operating agreement is a legal document that outlines the internal operations, rights, responsibilities, and decision-making processes of the LLC. An operating agreement is not always legally required…
When forming a Tennessee Limited Liability Company (LLC), having a well-structured and comprehensive operating agreement is crucial to ensure the security and continuing stability of your enterprise. An operating agreement is a legal document that outlines the internal operations, rights, responsibilities, and decision-making processes of the LLC.
An operating agreement is not always legally required for Tennessee LLCs. But it is often a very good idea for practical reasons. This is especially so for multi-member LLCs where there are many more variables to keep track of and deal with.
In this article, we will discuss four key aspects of a Tennessee LLC operating agreement that help an LLC run effectively.
1. Introduction of the LLC
The operating agreement should begin with a clear introduction to the LLC. It should detail the LLC’s legal name, principal place of business, registered agent, purpose, and the date of formation. Also wise to include are the business’s fiscal year, tax classification, and any additional trade names. This section establishes the groundwork for the agreement and provides essential information for both members and potential investors.
The operating agreement must align with what the LLC has in its Articles of Organization. For example, a member-managed LLC’s operating agreement should not say it is a manager-managed LLC.
It may also be wise to state certain information such as certain professionals involved in the business’s formation and/or operations. This can include your business attorney, accountant, and any other consultants involved.
2. Operating Agreements Describe Membership Structure and Roles
An operating agreement also outlines the membership structure of the LLC by specifying the roles and responsibilities of each member. This section should include details about how to bring in new members, the process for member resignation or removal, and the ownership percentage of each member.
Clearly defining the management structure, whether member-managed or manager-managed, is vital to avoid potential disputes. If member-managed, the members will handle daily business decisions. But if manager-managed, the members will have to hire a manager to oversee the LLC’s operations.
A succession plan can be a part of an operating agreement as well. This ought to coordinate with what the members’ respective estate plans are. An interest in an LLC is an asset included in a person’s estate. If a member dies, the operating agreement ought to have a process laid out for selling the member’s interest and paying the value of the share to his or her personal representative or beneficiaries.
Additionally, some members may have financial rights, but not necessarily voting rights. Laying out who these members are and clearly stating what rights such members do and do not have helps to keep all members on the same page.
3. Capital Contributions and Allocations of Profit & Loss
A well-drafted LLC operating agreement describes the capital contributions each member makes to the LLC and how members will divide profits and losses. This section should also cover the distribution of profits, including when and how distributions are available. Addressing these financial aspects ensures transparency and equity among members.
Tracking capital contributions is critical to ensure that all members’ investments are properly recorded. Should a member wish to sell his or her interest, there must be a paper trail of what that member put into the business initially, along with any additional contributions.
The allocation of profit and loss is also especially important. an LLC is a disregarded entity for tax purposes by default. The IRS treats a multi-member LLC as a partnership, and a single-member LLC as a sole proprietorship. Unless otherwise specified, under Tennessee law, members share in profits and losses equally.
If you desire something different for your LLC, your operating agreement may specify such allocation. Remember that the LLC is one of the most flexible business arrangements available—far more flexible than the older corporation form. The LLC operating agreement can even waive some provisions of Tennessee’s default laws.
4. Operating Agreements Cover Decision-Making and Voting
The operating agreement should detail the decision-making process within the LLC. This ought to highlight major business decisions that require unanimous consent versus those that are permissible with a simple majority vote. Address issues such as quorum requirements, voting rights, and procedures for resolving disagreements.
The operating agreement also ought to specify the scope of authority members and/or managers have to make business decisions. For example, an LLC may authorize its members/managers to make decisions in the ordinary course of business without requiring a formal vote. This may include routine purchases of inventory and authorizing payroll for the workforce.
On the other hand, decisions such as contracting with new vendors, signing commercial leases, and hiring management personnel likely should be up to voting members/managers. The operating agreement can specify either way.
Additionally, in an increasingly digital age, an LLC may wish to overtly allow members to attend meetings through video conferencing. The LLC’s operating agreement may permit this, or prohibit it based on what the members desire.
A clear decision-making framework prevents conflicts and promotes efficient governance. For example, let’s say an LLC has two members, each with 50% ownership, voting rights, and sharing of profits and losses. If there is no mechanism for breaking a tie vote, the business could be stuck until the parties reach a compromise.
The operating agreement can provide for remedies in such a situation. The engagement of business consultants or some objective criteria can provide a way to help break a tie and resume business decisions. Even mediation or arbitration may be on the table.
Whatever the mechanism is, the operating agreement can lay out a procedure for it so that the business can continuing operating even during disagreements.
Final Notes on Tennessee LLC Operating Agreements
A meticulously-drafted LLC operating agreement is a cornerstone of successful business management and member relations. Each LLC will have different provisions based on its operations, membership composition, and objectives. The key is to ensure that your operating agreement provides clarity among all members about how the business will operate daily and at a high level.
In an age of increasing entrepreneurship, it is vital that new businesses have internal governing structures in place that will help them through both good and hard times.
For customized assistance in drafting a Tennessee LLC operating agreement, contact Connell Law, PLLC to schedule your free consultation.
