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I. STRUCTURE OF THE REVISED ACT ....................................313
II. NON-WAFVABLE PROVISIONS ...........................................314
A. Administrative.........................................................314
B. Fiduciary Duties.....................................................316
C. Indemnification and Liability.................................320
D. Membership Matters..............................................321
E. Distributions........................................................... 322
III. IMPORTANT DEFAULT PROVISIONS ...................................324
A. Capital Contributions..............................................324
B. Management............................................................326
C Termination of Membership Interests and Consequences..........................................................330
D. Indemnification.......................................................337
E. Restrictions on Transfers of Membership Interests...................................................................342
F. Allocations and Distributions.................................344
G. Amendments............................................................346
H. Dissolution..............................................................347
7. Dissenters' Rights....................................................348
J. Summary.................................................................348
IV. CONCLUSION.....................................................................348
In 1994, the General Assembly passed the Tennessee Limited Liability Company Act ("Original Act"), which added limited liability companies (LLCs) to the available choice of business entities in Tennessee.1 The General Assembly amended the Original Act several times over the next eleven years, and in 2005, adopted a new act for LLCs entitled Tennessee Revised Limited Liability Company Act ("Revised Act").2 The Revised Act became effective January 1, 2006, for LLCs formed in Tennessee on or after that date, as well as for LLCs formed under the Original Act, which elected or elect to be governed by the Revised Act.3
The Revised Act reflects substantial changes to the Original Act and does not follow the Uniform Limited Liability Company Act or any other state's act, including the Delaware Limited Liability Company Act ("Delaware Act"), which many practitioners commonly use.4 For those reasons, a careful study of the Revised Act is necessary before practitioners decide to form an LLC under the Revised Act. The purpose of this article is to analyze the Revised Act and provide guidance on drafting an operating agreement under its provisions.
I. STRUCTURE OF THE REVISED ACT
When the Original Act was passed, the issue of whether an LLC would be taxed as a corporation or a partnership for federal income tax purposes depended on four characteristics: centralized management, continuity of life, limited liability, and free transferability of interests.5 The Original Act contained mandatory rules that ensured that the LLC was taxed as a partnership by restricting the transferability of interests and prohibiting continuity of life.6 Since the enactment of the Original Act, federal tax laws have changed, and, consequently, the Original Act has been amended to change or remove the mandatory rules that ensured taxation as a partnership.7 The use of mandatory rules, however, was continued from the Original Act and is a...