What is an LLC Operating Agreement?

An LLC operating agreement is the governing document for a limited liability company. In Texas LLC law, it’s called a company agreement. No matter what you call it, though, it’s a legally binding agreement between the members of an LLC. It documents the ownership of the company and defines the members’ roles, rights, and responsibilities.

It lays out who the members are, what percentage of ownership each of them has, and what each one’s management privileges and responsibilities are. It dictates how the LLC will be governed ,how the proceeds will be distributed, how new members can come aboard and existing ones leave, and what will happen if the company dissolves.

It helps establish the company’s legitimacy to file for an LLC in Texas and obtain its corresponding rights to the taxation and liability benefits of an LLC. It protects each member’s interests in case of internal malfeasance or disputes. It certifies the company’s credibility: many banks will insist on an operating agreement before they open a business account or lend money.

Why is an Operating Agreement Important for Texas LLCs?

While there’s no law that requires a Texas LLC to have a company agreement, every LLC should regard it as a business necessity. For starters, it establishes clarity about what roles, rights, and responsibilities each member has. It is a legal document that has the force of law; if there is a dispute among members that winds up in court, the courts will refer to the business operating agreement to settle such disputes. Without a company agreement, the default Texas regulations for LLCs will hold sway. The state will decide how disagreements will be settled, how proceeds will be distributed, and how assets will be divided, often without regard to what members may have informally agreed on.

Even for a single-member LLC, an operating agreement is critical. We’ve already touched on the fact that it establishes credibility. It cements your legitimacy as an LLC, and you will often need it if you go to a bank to open a business account or to secure a loan. It draws a clear line between your personal assets and those of the LLC. This is important when it comes to paying taxes and availing yourself of the liability and tax advantages of your LLC.

Operating an LLC without a business agreement creates an unnecessary risk that no business owner should accept.

Key Components of a Texas LLC Operating Agreement

Because it is not a legally required document, there is no definitive list of what a Texas company agreement must contain. You are free to include anything you think might be relevant during the life of the LLC. However, there are some basics that are important to address, including management structure, ownership, initial capital contributions, rules for changing members, and rules for dissolution. Here are some components to consider.

Basic Company Details

These include the LLC name and the fact that the company is a Texas LLC subject to Texas law. It also states the business purpose, the address of the business, and the names of the members. It should include the date of formation and the expected duration of the LLC.

Capital Contributions

This lists the amount of money, assets, and other property each member brought into the LLC at startup. It may also address how members might make additional contributions. The amount that each member owns is called the LLC membership interest, and it’s generally expressed as a percentage.

Distribution of Proceeds

This declares how and when profits will be distributed to the members. Profits and losses are allocated among the members based on their membership interest.

Management

This delineates how the business will be operated and how decisions will be made. It details voting rights of the members. It states what the officers are and how they will be chosen. It lays out their roles and responsibilities. It states how disputes will be settled. It often contains indemnification clauses to protect members from legal action when they act in good faith. This may also address how company bookkeeping will be done.

Compensation

In some cases, members who bring professional expertise to the LLC will be paid directly, apart from their share of the LLC profits. Members who actively manage the LLC may receive compensation that does not go to less active members. This section would determine how payment amounts will be decided.

Change of Membership

When a member “cashes out” and leaves the LLC, this constitutes a transfer. It’s generally specified that the remaining members will have “first dibs” to buy the leaving members’ interest. This would also dictate how members will determine the value of the interest and what form payment to the departing member will take.

It would also address under what circumstances the leaving member can sell to an outside party, as well as how any new member could join the LLC. In most cases, the agreement will specify that the new member must be unanimously approved.

Dissolution

The specifies the circumstances under which the LLC will be dissolved, the required approval process, and the steps for carrying out that dissolution.

Amendments

This lays out the process for making changes to the operating agreement. You should note that, if they agree, the members can change the company agreement at any time by simply writing and signing a new agreement that will supersede the old one.

Certification

All members must sign and date the operating agreement.

How to Create an LLC Operating Agreement in Texas

The members can simply sit down and create a Texas LLC company agreement from scratch, including whatever they think is necessary. There are a number of vendors that offer templates that guide the LLC through the process. These provide boilerplate language with space to fill in the details that apply specifically to your LLC.

While Texas law doesn’t require you to engage a lawyer to create an LLC, it’s important to remember that the agreement is a legally binding document. Many business owners will have peace of mind and avoid future disputes if they do hire an attorney. Even if a lawyer doesn’t actually write the LLC, it’s good practice to have one review it to make sure there are no ambiguities and that nothing critical is left out.

Texas-Specific Considerations

In Texas law, the agreement is referred to as a company agreement. No matter what you choose to call it, the law makes it clear that a document of this type is legally binding and will be referenced to resolve any disputes that wind up in a courtroom.

Final Thoughts & Next Steps

As you can see, no Texas LLC should be without an operating agreement. It guides business decision-making and resolution of disputes. If establishes your legitimacy as an LLC and your credibility with banks and lenders. Without it, your LLC may be governed by Texas state law in ways that the members would not choose.

One of the best ways to get started with your operating agreement is to use an online LLC formation service. These services not only guide you through the operating agreement but also help file articles of organization, establish registered agents, and obtain an employee ID number and comply with tax regulations. Many offer ongoing LLC support in such areas as required state reporting. It’s a great way to cover all the bases as you ramp up your LLC.

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