Key Takeaways:

  • An Obligated Member Entity (OME) allows exemption from Tennessee excise and franchise taxes, provided all members accept joint and unlimited liability.
  • OMEs include LLCs, LLPs, and LPs where all owners file election paperwork with the Secretary of State and the Department of Revenue.
  • Failure to meet OME requirements can lead to tax liability or exemption loss.
  • Ownership changes, such as admitting a new member, must be accompanied by proper filings within 60 days.
  • The structure must reflect clear roles, liabilities, and obligations in its governing documents.

An obligated member entity (OME) entails unlimited liability protections and exemption from state taxes. Tennessee levies excises and franchise taxes on all legal entities, unless a company can gain exemption. The intent of the measure was to levy taxes on business entities that offered limited liability to one or more of the owners. However, Tennessee codes exclude obligated member entities. Such entities can file the appropriate paperwork with the secretary of state office. In addition, it requires annual and initial filing with the Tennessee Department of Revenue to avoid paying excise and franchise taxes.

Further, if entity owners of an OME provide liability to other members, the OME (excluding the owner) will be held liable for excise and franchise taxes on income. Unless the partnership contract or operating agreement states otherwise, the cost will be divided among all owners, and not by the owner where the status causes the OME to initiate the taxation.

OME Specifics

OME means that all partners and members are liable for debts and obligations of an entity. This pertains to documentation that was filed with the secretary of state. OME covers the following entities:

  1. Limited partnerships
  2. Limited liability partnerships
  3. Limited liability companies

The owners electing joint and unlimited liability are known as obligated members, or OMs. If the organization admits another member, the new owner must file the necessary paperwork to gain unlimited liability with the secretary of state within 60 days of being accepted into the organization.

Failure to submit the paperwork in a timely fashion will lead to a loss of exemption to the OME. However, it is uncertain if the exemption is removed from the OME on the admission date of the owner, or after the 60th day of the owner’s admission into the group.

To prevent the loss of the exemption, a new owner should be required to file for the election when he or she is accepted into the organization. Owners may unintentionally or intentionally elect liability without the entity growing into an OME. The necessary filing with state officials should be signed by all owners. Trusts, nonprofits, and estates must usher the election, but the beneficiaries or owners do not have personal liability.

Further, OMEs will not be under the tax regarding such owners if other OME mandates are not satisfied. This includes the following entities:

  1. LLCs
  2. LLPs
  3. LPs

Failure to adhere to mandates may cause the tax exemption to be removed, but it could result in an owner absorbing liability.

Eligibility Requirements for OME Status

To be recognized as an obligated member entity in Tennessee, a business must meet specific structural and procedural requirements, including:

  • Full liability assumption: All members, partners, or associated individuals must assume unlimited liability for the entity’s debts and obligations. This applies to domestic and foreign limited liability companies, limited partnerships, and limited liability partnerships.
  • Filing with the Secretary of State: The entity must file official documentation indicating this unlimited liability status. Without this filing, the entity will not qualify for exemption from excise and franchise taxes.
  • Consistent membership liability: If a new member is added to the entity, they must file their liability election within 60 days. A lapse or delay can disqualify the entire entity from tax exemption status.
  • Series LLC and Protected Series: These structures can also qualify, provided all members of each series agree to unlimited liability and file accordingly.

Entities not fulfilling these obligations will remain subject to state taxes, even if some members attempt to assume liability individually.

OME Qualifications

To gain OME status, your limited partnerships must have the following traits:

  1. All partners must submit documents with the secretary of state office to gain unlimited liability
  2. The partnerships must have a written contract in place that contains detailed provisions

Any certificate or amendment that may offer such an election is only useful if all limited partners maintain and make such elections. Also, they must identify all partners and state that they are part of the group. The limited partners should remain responsible for all liabilities, obligations, and debts in the same manner as general partners.

  1. The limited partner exits the partnerships and must note the withdrawal to the secretary of state office
  2. A certificate or amendment is amended in writing, and it is signed by the unelected limited partner to remove the name of a limited partner

The limited partnership certificate could provide all partners to choose personal and joint liability, including amendments; striking a limited partner would mean a strike for all partners. This means that if a single partner no longer holds liability then all the members will lose liability as well.

Limited partners who have elected unlimited liability in the past, and wish to stop being liable, should file a document to choose to no longer have unlimited liability with the secretary of state’s office. They must also submit a copy to the general partners, including all other obligated LPs that have been identified in the records that are on file at the state office.

Tax Consequences of Non-Compliance

If an entity claiming OME status fails to meet statutory obligations, the following consequences may apply:

  • Loss of Tax Exemption: The Tennessee Department of Revenue may disqualify the entity from tax exemption, resulting in retroactive or current excise and franchise tax liability.
  • Joint Liability Distribution: In the absence of a clear agreement, liability for taxes may be apportioned among all members, not just the individual who caused the violation.
  • Documented Withdrawal Required: Members wishing to end their unlimited liability must submit a written revocation to both the Secretary of State and all partners, or the exemption is still considered valid for tax purposes.

Necessary Information

Aside from the filing, a limited partnership must have the following:

  1. The sole aim of the partnership
  2. Names of all partners
  3. Authority structure within the partnership, including the inclusion of obligations and debt without partnership approval

Operating Agreement Considerations

A well-drafted operating agreement or partnership contract is essential for an entity seeking OME status. It should include:

  • Clause on Unlimited Liability: Clearly state that all members accept personal and joint liability for the entity’s obligations.
  • Identification of Obligated Members: List all individuals or entities who are assuming such liability.
  • Terms for Admission and Withdrawal: Define the process and deadlines for new members to become obligated or existing members to withdraw their status.
  • Compliance with Tenn. Code § 67-4-2008(b)-(d): Ensure the agreement aligns with Tennessee’s statutory requirements to qualify as an OME.

Frequently Asked Questions

  1. What is an obligated member entity (OME)?

    An OME is a business entity whose members assume joint and unlimited liability for its obligations, making it eligible for exemption from Tennessee’s excise and franchise taxes.

  2. Which entities can qualify as OMEs?

    LLCs, LLPs, and LPs may qualify, including series LLCs and protected series, if all members assume full liability and file the required documents.

  3. How can a new member maintain OME status?

    They must file an election for unlimited liability within 60 days of joining. Otherwise, the entity risks losing its tax-exempt status.

  4. What happens if an OME fails to file properly?

    The entity becomes liable for Tennessee state excise and franchise taxes, potentially retroactively.

  5. Do nonprofits or trusts qualify as OMEs?

    Yes, but only if the entity, not individual beneficiaries or owners, assumes the liability and complies with the statutory requirements.

To learn more about obligated member entity, you can post your job on UpCounsel’s website. UpCounsel’s attorneys will give you more insight into how you can properly assign liability within your partnership structure. Also, they will read over any contracts on your behalf before you must sign them.