Determining Whether Someone Is, or Is Not, an LLC Member Under Tennessee Law
In most cases, members of Tennessee limited liability companies will ensure, at the time of formation, that there is properly signed documentation establishing who the members are and their respective membership interest percentages. Most often, this is done in an operating agreement.
It is not unusual, however, given the pace of many business deals, for LLC members—or those claiming to be members—to fail to clarify in writing who the members are and/or what percentage each member owns.
The Tennessee Revised Limited Liability Company Act (the “LLC Act”) provides the framework and procedures for forming a Tennessee LLC. It also provides default provisions that apply when members fail to agree on certain terms related to governance or their rights as members.
For example, the LLC Act sets forth voting rights of members, fiduciary duties of members, the right of members to review LLC records, and the allocation of profits.
However, the LLC Act gives no guidance on how to determine who the members of an LLC are—or their ownership percentages—if those matters have not been clearly agreed to in a written document such as an operating agreement.
Because the LLC Act is silent on this point, Tennessee case law provides the only authoritative guidance. (Case law from other states can be persuasive as well.) As of now, there are only two Tennessee cases that address this issue: Parigin v. Mills (2017) and Heatherly v. Off the Wagon Tours, LLC (2021).
Parigin v. Mills (Tenn. Ct. App. 2017)
Mills claimed to be a member of the LLC.
It was undisputed that Mills had never contributed money to the LLC.
Mills was actively involved in forming the LLC and operating it after formation.
Mills conceived the business idea and discussed it with Landers.
Mills and Landers had a lawyer prepare articles of organization and an operating agreement.
Both documents stated the LLC had two members, but neither Mills nor Landers signed the operating agreement.
Landers testified that Mills told him he needed to contribute $180,000 for membership, and since Landers did not have the money, he walked away.
Mills then approached Parigin and Wheatley.
Parigin contributed $217,370; Wheatley contributed $50,000.
Multiple witnesses testified that Mills said he would contribute $180,000 for his interest.
A second operating agreement was prepared, listing Mills and Parigin as equal contributors ($217,500 each), but it was never signed.
Based on these facts, the court determined that Mills was not a member and had no ownership interest.
Heatherly v. Off the Wagon Tours, LLC (Tenn. Ct. App. 2021)
Heatherly conceived the idea for a downtown Nashville “party wagon” business.
Carney agreed the idea was Heatherly’s and had LegalZoom file the articles of organization.
The articles stated there were four members, but did not identify them.
Carney admitted he offered Heatherly a 5% membership interest.
An operating agreement was prepared listing both Carney and Heatherly as members, but Heatherly never signed it.
Carney provided the start-up funds; Heatherly contributed time and effort, but no money.
When the relationship soured, Carney’s lawyer offered to “purchase Heatherly’s shares.”
Carney admitted Heatherly was his “partner.”
The court determined that Heatherly was, in fact, a member.
Key Lessons
From Heatherly, a member’s failure to sign an operating agreement is not fatal if other facts support membership. It also shows that monetary contribution is not required to become an LLC member—time, effort, or other contributions may suffice.
From both cases, the lesson is clear: when there is no properly executed documentation setting forth LLC members and their ownership, Tennessee courts will examine the surrounding facts to determine membership.
If you are involved in a limited liability company dispute, you should consult with a qualified Tennessee lawyer to assess your rights and likelihood of success.