Texas LLC Operating Agreements | A Comprehensive Guide

When forming a Limited Liability Company (LLC) in The Lone Star State, one of the most critical steps you can take is to create and execute an LLC Operating Agreement. This legally binding document outlines your LLC’s ownership, management, and operational procedures, ensuring that your business runs smoothly and is protected from potential disputes and legal issues. Although only sometimes required by state law, having a well-drafted operating agreement is essential for an LLC. This article will explore the importance of an Operating Agreement in Texas and discuss its key components.

Webinarcare Editorial Team will help you understand the process of having an operating agreement for your Texas business. You must be guided by all the factors gathered in this article.

What is an Operating Agreement?

An operating agreement is a legally binding document that outlines a limited liability company’s ownership structure, management, and operational procedures (LLC). It governs the internal workings of the LLC and establishes the rights, responsibilities, and obligations of its members (owners) and managers. An operating agreement typically covers the company’s formation, purpose, ownership interests, capital contributions, management structure, financial matters, profit and loss allocations, distributions, and the process for admitting new members or handling member withdrawals.

Although not always required by state law, having a well-drafted operating agreement is essential for an LLC. It helps prevent potential disputes among members, ensures smoother business operations, and provides a clear framework for making decisions and resolving issues. It also helps to establish limited liability protection for the members by demonstrating that the LLC is a separate legal entity with its own rules and procedures.

Texas LLC Operating Agreement Content

An operating agreement is a legal document detailing the LLC’s organizational structure and operational procedures. It includes forming the Texas LLC, members, and ownership, management structure, financial matters, limitation of liability and indemnification, dissolving of Texas business, amendments and modification, miscellaneous provisions, and execution and adoption.

Formation of the LLC

The first step in creating an LLC Operating Agreement is to outline the basic information about your LLC, such as:

1. Name of the LLC: Your LLC’s name must include the words “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.” and comply with the Texas LLC naming requirements. In Texas, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 120 days. To keep the name, you must file a name reservation application in Texas Secretary of State.

The online name reservation fee costs around $40, while the mail name reservation fee costs $40.

2. Principal Office Address: This is where your LLC’s primary business activities will be conducted.

3. Registered Agent Information: Your Registered Agent is a person or entity designated to receive legal documents on behalf of your LLC. The Registered Agent must have a physical street address in Texas. It’s essential to choose a reliable and responsible Texas Registered Agent, as failure to receive and respond to legal documents can have serious consequences for your Texas Business.

You can serve as your own Registered Agent or appoint a friend, family member, or professional Registered Agent Registered Agent Services.

4. Purpose of the LLC: This section should describe the primary purpose of your LLC and the types of business activities it will engage in.

Members and Ownership

An LLC Operating Agreement should clearly define the business’s ownership structure. This includes:

Initial Members: The names and addresses of each initial member should be listed, along with their respective ownership interests.
Ownership Interests: This section should detail each member’s ownership interest percentage.
Capital Contributions: Each member’s initial capital contribution to the LLC should be documented, along with any additional contributions that may be required.
Additional Members: The agreement should outline the process for admitting new members to the LLC and the rights and responsibilities of these new members.
Transfer of Membership Interests: The operating agreement should contain provisions governing the transfer of membership interests, including transfer restrictions and the right of first refusal for existing members.
Withdrawal of Members: The process and consequences for members who wish to withdraw from the LLC should be clearly defined. In Texas, there is a definite guideline on How to Remove a Member in your Texas LLC.

Management Structure

Your LLC Operating Agreement should outline the management structure of your business. This includes

1. Member-Managed vs. Manager-Managed: You must decide whether your LLC will be managed by its members or appointed managers. This decision will impact the roles and responsibilities of each party.

A Member-Managed LLC is a type of limited liability company (LLC) where the management and day-to-day operations of the business are handled by its members (owners) directly. In a Member-Managed LLC, each member has the authority to make decisions and take actions on behalf of the company, such as entering into contracts, hiring employees, and managing the finances.

This management structure contrasts with a Manager-Managed LLC, where the members appoint one or more managers to oversee the business operations. In a Manager-Managed LLC, the appointed managers have the authority to make decisions and act on behalf of the company. In contrast, the members typically have a more passive role, focusing on high-level decision-making and strategic planning.

2. Roles and Responsibilities of Members/Managers: The agreement should define the roles and responsibilities of each member or manager, including their duties, decision-making authority, and any limitations on their powers.

3. Voting Rights and Decision-Making Process: The agreement should outline the voting rights of each member or manager and the decision-making process for various business matters.

4. Meetings and Notice Requirements: The operating agreement should specify the frequency of meetings, the process for calling special meetings, and the notice requirements for each type of meeting.

Financial Matters

Your LLC Operating Agreement should address various financial matters, such as:

1. Allocation of Profits and Losses: The agreement should detail how profits and losses will be allocated among the members, typically based on their own interests.

2. Distributions to Members: The process for distributing profits to members should be outlined, including the timing and manner of distributions.

3. Tax Treatment and Filing Requirements: The agreement should specify your LLC’s tax treatment and any required filings with the Texas tax authorities. You should include the filing of Certificate of Formation, Annual fees, and other associated fees that need to be filed.

For the initial and final cost for the formation of your Texas LLC, look up the LLC Cost in Texas for additional information.

4. Accounting and Recordkeeping: The operating agreement should outline the accounting methods and recordkeeping requirements for your Texas LLC. Effective financial management is important for the success of your Texas LLC. Establish a reliable accounting system to track income, expenses, and tax obligations. You can manage your finances using spreadsheets, accounting software, or Hiring a Professional Accountant.

5. Fiscal Year: The agreement should specify the fiscal year for your LLC, which may be either a calendar year or any 12-month period.

Limitation of Liability and Indemnification

To protect the personal assets of your LLC’s members and managers, your operating agreement should address the following:

Liability of Members/Managers: The agreement should limit the liability of members and managers for the debts and obligations of the LLC, following Texas law.
Indemnification Provisions: The operating agreement should include provisions for indemnifying members and managers for actions taken on behalf of the LLC, as long as those actions are within the scope of their duties and do not involve gross negligence or willful misconduct.
Insurance Requirements: The agreement should specify any insurance requirements for your LLC, such as liability or property insurance. Small business insurance helps safeguard your business from financial losses, legal claims, and other unforeseen events. This protection allows entrepreneurs to focus on growing and sustaining their businesses within the Texas economy.

You may check out the Best Small Business Insurance in Texas to learn more about business insurance.

Dissolution and Winding Up

Your LLC Operating Agreement should address the process for dissolving and winding up the business, including:

1. Events Triggering Dissolution: The agreement should list the events that will trigger the dissolution of your LLC, such as the death or withdrawal of a member, a unanimous vote of the members, or a court order.

Some common events include:

A unanimous vote of the members to dissolve the business.
The death, resignation, or withdrawal of a member unless the remaining members agree to continue the business.
The expiration of a specified period or the completion of a specific purpose, as outlined in the operating agreement.
A court order mandating the dissolution of the LLC.

2. Winding Up Process: The operating agreement should outline the process for winding up the affairs of the LLC, which typically involves:

Settling the company’s outstanding debts and obligations.
Liquidating the company’s assets.
Resolving any pending legal disputes.
Preparing and filing final tax returns.

3. Distribution of Assets: The operating agreement should specify how the LLC’s remaining assets will be distributed among the members upon dissolution, typically in proportion to their ownership interests.

4. Certificate of Cancellation: After the winding-up process is completed, the LLC may be required to file a certificate of cancellation or articles of dissolution with the Texas Secretary of State to formally dissolve the company and remove it from the state’s records.

Amendments and Modifications

Your LLC Operating Agreement should include a process for making amendments and modifications, such as:

Process for Amending the Operating Agreement: The agreement should outline the process for proposing, considering, and approving amendments to the operating agreement.
Required Approval for Amendments: The agreement should specify the percentage of member approval required to amend the operating agreement.

Miscellaneous Provisions

Your LLC Operating Agreement should include various miscellaneous provisions, such as:

Governing Law: The agreement should specify that Texas law governs the interpretation and enforcement of the operating agreement.
Dispute Resolution: The agreement should include a process for resolving member disputes, such as mediation or arbitration.
Severability: The agreement should include a severability clause, which states that if any provision of the agreement is unenforceable, the remaining provisions will still be in effect.
Entire Agreement: The agreement should include a statement that constitutes the agreement between the parties and supersedes any prior agreements or understandings.

Execution and Adoption

Once your LLC Operating Agreement has been drafted, it should be executed by the initial members or managers and adopted by any additional members who join the LLC.

Advantages of Having a Registered Agent to Create An Operating Agreement For Your Texas LLC

A Registered Agent is a person or entity designated to receive legal documents and official correspondence on behalf of an LLC. While the primary role of a Registered Agent is to maintain a reliable point of contact for legal matters, some registered agent service providers also offer additional services, such as creating an operating agreement for your LLC. Below are some advantages of having a Registered Agent create an operating agreement for your business:

Expertise: Registered Agent who specialize in LLC Formation Services often have extensive knowledge and experience drafting operating agreements. They are familiar with the requirements and best practices for creating a comprehensive and legally compliant operating agreement, which can help protect your business interests and minimize potential disputes among members.
State-Specific Requirements: Registered Agent who offer operating agreement services are well-versed in state-specific laws and regulations governing LLCs. They can ensure that your operating agreement complies with the specific requirements of the state in which your LLC is formed, including mandatory provisions and filing requirements.
Time-Saving: Drafting an operating agreement can be complex and time-consuming, especially for business owners unfamiliar with legal terminology and procedures. By delegating this task to a Registered Agent, you can save time and focus on other crucial aspects of your business.
Customization: A Registered Agent with experience creating operating agreements can tailor the document to meet your business’s unique needs and circumstances. They can help you address specific management structures, financial arrangements, and other critical aspects of your LLC that may not be covered in a generic operating agreement template.
Ongoing Support: Some Registered Agent services provide ongoing support and guidance in maintaining and updating your operating agreement as your business grows and evolves. This can help ensure that your operating agreement remains relevant and compliant with changing laws and regulations.

While there are advantages to having a Registered Agent create an operating agreement for your LLC, it is essential to carefully review and understand the terms of the agreement before signing. Additionally, it is a good idea to consult with legal and tax professionals to ensure that the operating agreement aligns with your business goals and complies with all applicable laws and regulations.

FAQs

What is an LLC operating agreement in Texas?

An LLC operating agreement in Texas is a legal document that outlines the ownership and management structure of a limited liability company (LLC) registered in Texas.

Is it mandatory to have an LLC operating agreement in Texas?

While there is no legal requirement to have an LLC operating agreement in Texas, it is highly recommended as it helps to protect the rights, responsibilities, and liabilities of the members.

What should be included in an LLC operating agreement in Texas?

An LLC operating agreement in Texas should include details regarding the allocation of profits and losses, voting rights, dispute resolution, mechanisms for adding or removing members, and the overall governance structure.

Can an LLC operating agreement in Texas be amended later?

Yes, an LLC operating agreement in Texas is a flexible document that can be amended as the needs of the LLC and its members change over time.

Can two LLCs formed in Texas have the same operating agreement?

Yes, two LLCs formed in Texas can use the same operating agreement, but they must execute separate agreements to formally standardize membership establishment, capitalization and organization

Should an LLC operating agreement in Texas be filed with the state?

No, an LLC operating agreement in Texas is an internal document belonging to the LLC and need not be filed with the state.

Who should sign an LLC operating agreement in Texas?

All members of an LLC should sign an LLC operating agreement in Texas to acknowledge and agree on the terms of the agreement.

When should an LLC operating agreement in Texas be prepared?

An LLC operating agreement in Texas should be prepared as soon as possible after the LLC has been formed and the founders have agreed to the initial operating terms.

Can an LLC operating agreement in Texas waive fiduciary duties?

No, an LLC operating agreement in Texas cannot waive fiduciary duties as defined by law as self-dealing or corporate fraud as required by the Code of Texas.

Is it possible to sue an LLC with an operating agreement in Texas?

Yes, it is possible to sue an LLC with an operating agreement in Texas if its actions harm another party by third-party actions; individual members are unaffected, safe for personal injury damage violations.

How many members should an LLC have in Texas?

An LLC in Texas can have more than one member (multi-member LLC) or just one member (single-member LLC).

Can a non-resident of Texas be a member of an LLC in Texas?

Yes, a non-resident can be a member of an LLC in Texas.

What documents are required to form an LLC in Texas?

To form an LLC in Texas, the Certificate of Formation and Texas LLC Operating Agreement, along with an LLC filing fee with the Texas Secretary of State’s office must be filled.

How long does it take to form an LLC in Texas?

It typically takes 3-5 business days for the Texas Secretary of State’s office to process a Certificate of Formation, after payment of the filing fee; there is sometimes more time required once receiving approval.

Can a foreign entity form an LLC in Texas?

Yes, a foreign entity can form an LLC in Texas, but it must have a Texas registered agent and follow specific operational rules.

What is a registered agent in Texas?

A registered agent in Texas designated by the LLC is responsible for receiving official notices and legal documents on behalf of an LLC.

Can a registered agent be a member of the LLC in Texas?

Yes, a member or organizer of the LLC can act as its registered agent in Texas.

Can a Texas LLC operating agreement be written under a legal term of existence?

Yes, as far as they comply with the Code of Texas having a term of Existential life extension can be established.

What happens if an LLC doesn’t have an operating agreement in Texas?

In this case, Texas state laws will govern the operations, membership rights, allocations; similarly, the Court chooses the most appropriate option to determine amendments and modifications.

Who can prepare a Texas LLC operating agreement?

An LLC attorney, accountant or business formation professional can draft an LLC operating agreement in Texas.

Can a Texas LLC operating agreement be oral or implied?

No, while an LLC operating agreement could be established as unwritten by represented and recorded behaviours, officially, it must be written in Texas.

Can the LLC operating agreement supersede the Texas state law?

An LLC operating agreement in Texas cannot supersede mandatory requirements or violate automatic membership rights assured by the state laws.

Who can make changes to an LLC operating agreement in Texas?

Texas LLC operating agreement may permit more specific members as authorized agents to effect operate or interpret changes whilst ensuring strict judicious adherence to legal rules in existence to obtaining altered certifications

Can new members be added to an existing Texas LLC operating agreement?

New members can be added to an LLC operating agreement in Texas either by amendment or by executing consent regarding agreement resolution by members, among critical modifications.

Can a Texas LLC operating agreement be terminated?

Yes, an operating agreement in Texas can be terminated by drafting an agreement between members but said termination does not result in closure or liquidation of the LLC.

Are LLC members liable for debts of the LLC in Texas?

In general, LLC Members are not personally liable for the debts of the LLC in Texas except if they deliberately act unlawfully or under State-level security laws, causing an instance of personal enforceability.

Can an LLC operating agreement be changed without unanimous approval in Texas?

LLC operating agreement can elect procedure to execute change approvals, consent prerequisites establishing a quorum of members where absence might not approve a minimal proposal, or elect to have but require specific take-required resolution methodology to initiate change requisites.

Can an LLC operating agreement in Texas limit issuing new members’ shares?

Texas LLC operating agreement can elect to grant term restrictions, owning percentages, etc., legally applicable Texas demands without property damage awareness litigation.

Do I need an operating agreement for my LLC in Texas?

While it’s not legally required, it’s highly recommended to have an operating agreement for your LLC in Texas to avoid potential disputes and clarify operating procedures.

Can an operating agreement be oral in Texas?

No, an operating agreement for an LLC in Texas must be in writing to be enforceable.

Can I create an operating agreement by myself for my Texas LLC?

Yes, as the owner of your Texas LLC, you can create an operating agreement by yourself, but it’s recommended to seek professional legal advice.

Who should review my Texas LLC operating agreement?

It’s recommended to have a lawyer review your Texas LLC operating agreement, but other professionals like accountants and financial planners can also provide guidance and expertise.

How can an LLC operating agreement help my Texas business?

An LLC operating agreement can clarify roles and responsibilities for each member, establish dispute resolution processes, and provide a clear path for business decisions.

Can an LLC operating agreement in Texas be amended?

Yes, an LLC operating agreement in Texas can be amended, but the process of amendment needs to be outlined in the initial agreement.

Is a signature required on an LLC operating agreement in Texas?

It’s recommended to have every member of the LLC sign the operating agreement in Texas.

Are LLC operating agreements in Texas public record?

No, an LLC operating agreement in Texas is not a public record.

Can an LLC operating agreement in Texas provide for different classes of members and interests?

Yes, an LLC operating agreement in Texas can provide for different classes of members and interests.

Do Texas LLC operating agreements have to be notarized?

No, LLC operating agreements in Texas do not have to be notarized, but all members should sign them.

Do Texas LLC operating agreements expire?

No, LLC operating agreements in Texas do not expire until anniversary of formation or future date is identified as expiration date within the agreement.

What happens if there is no LLC operating agreement in Texas?

If there’s no LLC operating agreement in Texas, state default provision kicks in.

Can one member of a Texas LLC have more rights than others?

Yes, a Texas LLC operating agreement can specify member rights and alter the default rules set by the law in varying ownership percentages among owners.

Is it costly to create and file an LLC operating agreement in Texas?

No, it is not much expensive to create and file an LLC operating agreement in Texas with the help of online free templates and government filing fee as just a one-time cost.

How long does it take to set up an LLC operating agreement in Texas?

It can take a matter of days to establish an LLC operating agreement in Texas based on how many members there are and the terms defined within the agreement.

If I only have one Texas LLC member, do I still need an operating agreement?

Yes, having a comprehensive operating agreement is recommended since it can help ensure your protection and aid in personal legal asset protection and clarity of operational guidance in the LLC.

Who governs LLC operating agreements in Texas?

Texas Business Organizations Code covers regulating LLC operating agreements in Texas

When should I review my Texas LLC operating agreement?

It’s recommended to review your Texas LLC operating agreement on an annual basis and update it whenever significant changes occur with state compliance.

Are documents required to amend a Texas LLC operating agreement?

No, documents are not required to amend a Texas LLC operating agreement

Can the IRS review my LLC operating agreement in Texas?

Yes, in the instance of legal or tax issues, the IRS may review LLC operating agreements in Texas.

What is the easiest way to create an LLC operating agreement in Texas?

Online LLC templates or consulting an attorney are the main ways for creating an LLC operating agreement in Texas.

Are LLCs innovative entities in Texas State legal framework?

LLCs in Texas often have flexibility in governance, profit distribution, liability protection compared to traditional structures like sole proprietorships or partnerships.

Can LLC operating agreement determine member rights to offset some of Texas LLC fees and charges?

Yes without any regard to the sometimes-significant government filings fees associated with startups in Texas, LLC operating agreement can indemnify some expenses with underlying owner equity.

How do I ensure that members abide by the LLC operating agreement in Texas?

Provisions that address how members connect to such clauses when connected with them may become binding can be a key way to ensure abidance of LLC state guidelines for contractual agreements.

Can Texas operating agreements separate management from ownership?

Yes, this is a somewhat common structure, one where certain members will possess voting shares in the LLC while certain groups or setouts explicitly control daily operational decisions in Texas.

Can Texas LLCs have unlimited length registered agents?

No, LLCs in Texas can have registered agents, but they must have a legal street address within the state, a person who is over 18 and living in Texas should be ready available at the registered address whenever accepting legal documentation on behalf of the LLC.

What if I cannot find a good fit in forming existing domestic and foreign LLCs?

It’s advisable to conduct thorough research of existing domestic and foreign LLCs to determine that the newly forming Texas LLC becomes less redundant or simple-minded in the domain where it often costs less filing fees. Finally, meet certain state-specific guidelines with distributions for reach company to see how they handle these states along with the accompanying LLC operating agreement they hold within business operation.

Conclusion

In conclusion, having a well-drafted LLC Operating Agreement in place is crucial for the success and protection of your Texas LLC. It provides a clear framework for the ownership, management, and operation of your business, helping to prevent disputes and ensure compliance with state law. It is highly recommended to consult with legal and tax professionals when drafting and executing your operating agreement to ensure it meets your specific needs and complies with all applicable laws and regulations.