If you’re starting or running a business in Texas, forming a Limited Liability Company (LLC) can offer numerous advantages. From shielding your assets to enjoying flexible tax options, an LLC provides a solid legal structure for your entrepreneurial endeavors. However, amid the excitement of establishing your business, there’s a critical component that should not be overlooked: the LLC operating agreement.
An LLC operating agreement in Texas is an internal legal document that outlines your business’s rules, regulations, and internal workings. Though not legally required in Texas, neglecting to create a comprehensive operating agreement for your LLC can expose you to potential risks and complications that could disrupt the stability and success of your enterprise.
This article will explore the necessity of having a well-crafted LLC operating agreement specifically tailored to Texas regulations. We’ll discuss the potential threats and challenges that can arise if you neglect this essential document, highlighting the importance of safeguarding your business interests.
By understanding the potential pitfalls of operating without an operating agreement, you can make informed decisions and protect your business’s future success in the dynamic Texas business environment. The article will also provide essential insights to get started with an operating agreement LLC Texas.
What Is an Operating Agreement for LLC Texas?
An operating agreement is a necessary component of any Texas LLC’s success. This paperwork specifies your company’s ownership and basic management structure—outline who owns the business, how much of the business they own, and their rights and responsibilities. The operating agreement should also clearly state who runs the business daily. Finally, this document will include provisions for possible future business opportunities, such as the dissolution of the business.
The rules for your Texas LLC are in your operating agreement. Even though it is not necessary by law, it is still a crucial document for your company. That’s why business lawyers, advisors, and accountants suggest making one to set expectations for the members, protect the LLC’s interests, and help lenders and potential investors understand the business.
Where to Get an Operating Agreement for Texas LLC
You can get an operating agreement for a Texas LLC from the three following places:
- Online Legal Service Providers: Various online legal service providers offer customizable operating agreement templates specifically designed for Texas LLCs.
- Texas Secretary of State: The website for the Texas Secretary of State may have sample operating agreement forms that you can use as a guide or a template.
- Business Lawyers: In Texas, you should talk to a business lawyer to ensure that your operating agreements are legally sound and fit your needs.
Remember that an operating agreement is a very important document that explains how your LLC works and who owns it, so it is important to ensure it fits your business needs and is in line with Texas law.
Types of LLC Operating Agreements
To better understand the operating agreement for your LLC, you should know the types of operating agreements. In Texas, LLC operating agreements are mostly of two types primarily, such as,
Single-Member LLC Operating Agreement
A single-member LLC operating agreement is designed for LLCs with only one owner, often called a “member.” Although Texas does not legally require single-member LLCs to have an operating agreement, it is highly recommended to create one. This agreement outlines the internal rules and regulations of the LLC and covers important aspects such as:
- Ownership: Clearly defining the member’s ownership interest in the LLC.
- Management: Outlining how the LLC will be managed, typically by a single member.
- Decision-Making: Establishing procedures for making decisions and handling day-to-day operations.
- Capital Contributions: Specifying the initial and future contributions of the single member.
- Profit and Loss Distribution: Defining how profits and losses will be allocated to the single member.
While the single-member operating agreement provides flexibility for the sole owner, it is also an opportunity to protect personal assets and establish clear guidelines for the LLC’s operations.
Multiple-Member Operating Agreement
A multiple-member operating agreement is designed for LLCs with two or more owners or members. In Texas, a multiple-member LLC is required to have an operating agreement. This agreement governs the relationship between members and covers important aspects such as:
- Ownership Interests: Defining the ownership percentages and capital contributions of each member.
- Management Structure: Determining whether the LLC will be member-managed or manager-managed.
- Decision-Making: Establishing voting rights and decision-making procedures among the members.
- Profit and Loss Distribution: Outlining how profits and losses will be allocated among the members.
- Dispute Resolution: Providing mechanisms for resolving conflicts between members, such as mediation or arbitration.
- Member Buyouts or Transfers: Addressing procedures for buying out a member’s interest or transferring ownership to another member or third party.
A well-drafted multiple-member operating agreement helps ensure clarity, fairness, and stability within the LLC, providing a framework for managing the business effectively and preventing disputes among members.
What to Include in a Texas LLC Operating Agreement
As every business is different, it should be no surprise that every operating agreement should be unique. Your operating agreement for LLC Texas will include key pieces of information about your LLC or limited liability company. Some of the information will be similar to your LLC Certificate of Formation, which you listed.
Your Texas LLC’s operating agreement must cover a lot of different things. To create an engaging and effective operating agreement for your LLC in Texas, here are some key points to include:
- Name and Purpose: Include the LLC’s legal name and its primary purpose or business activities.
- Formation and Term: Specify the date of formation and the duration of the LLC, which can be perpetual or for a specific period.
- Members and Ownership: Identify the initial members of the LLC and their respective ownership percentages or membership interests. Outline the process for admitting new members and transferring ownership interests.
- Management Structure: Define whether the LLC will be managed by its members (member-managed) or by designated managers (manager-managed). Specify the authority and responsibilities of managers, if applicable.
- Mention the Registered Agent: When establishing your LLC in Texas, you must choose a registered agent before filing the Certificate of Formation with the Secretary of State. You must mention that the registered agent’s name in your LLC operating agreement is in Texas.
- Voting Rights and Decision-Making: Establish the process for holding meetings, both in-person and remotely, and the rules for voting on various matters. Specify the matters that require a unanimous vote and those that a majority or supermajority can decide. This section should also include meeting procedures, voting rights, and how disputes or deadlocks will be resolved.
- Capital Contributions: Specify the initial capital contributions made by members and any subsequent contributions required. Describe the procedure for handling additional capital contributions if needed.
- Address Dissolution and Buyout Procedures: Clearly state the duration of the process for dissolving the LLC if necessary, including voluntary and involuntary dissolution scenarios. Also, include buy-out provisions if a member wants to leave or sell their interest. This section should outline how the purchase price will be determined and how the remaining members can acquire the departing member’s interest.
- Signature Page: Lastly, you must add a signature page where company representatives and members agree to follow the rules and regulations by signing the document or agreement.
- Amendments to the Operational Agreement: The Operating Agreement is modifiable and adaptable to your business’s requirements. At least once per year, every member should review the document to determine if any changes are necessary. Additionally, the document must be updated whenever economic or functional changes are made to business governance.
The operating agreement should specify how it can be modified. Who must vote to make changes to which points? Does a unanimous vote or simple majority suffice? Who must sign off on the final modifications? Answer all of these questions immediately to decrease confusion in the future.
- Severability Clause: Almost every legal contract has something called a “severability clause.” It’s just a short phrase that states that if one part of a legal contract is found to be wrong or invalid, it does affect the validity of the remaining parts. You should also include this clause to ensure one small mistake or oversight doesn’t ruin the whole operating agreement.
What Not to Include in an Operating Agreement for an LLC
Now you know what an operating agreement is, the types of operating agreements, and what essential elements you need to put in it. But for your concern, you need to know that there are necessary elements that you should avoid including, as they can create unnecessary conflicts or complications, such as:
- Business vision,
- Mission statement,
- Market research,
- Product sourcing,
- Staffing and Marketing strategies.
Why Do You Need an Operating Agreement?
Who needs rules, right? Well, operating agreements for LLCs in Texas might seem like unnecessary paperwork, but trust me, you don’t want to skip this important step!
You may ask me, “Why do I need an operating agreement? Does Texas require an operating agreement for LLCs?”
The answer is “Absolutely!” Consider an operating agreement as the “GPS” for your LLC’s journey in Texas. While it’s not mandatory by state law, having one is like having a roadmap that ensures a smooth and successful ride.
Here’s why you should consider an operating agreement for your Texas LLC:
- No Roadblocks: With an operating agreement, you define the ownership structure, roles, and responsibilities of LLC members. It’s like setting traffic rules to prevent confusion and disagreements down the road.
- Protect Yourself: By having an operating agreement, you safeguard your personal liability protection. It’s like putting on a seatbelt for your business—essential for shielding your personal assets from any unforeseen bumps in the road.
- Cruise Control: Your operating agreement allows you to establish rules and procedures for important matters like finances, decision-making, and profit sharing. It’s like having an autopilot feature that keeps your LLC running smoothly, even when you’re not in the driver’s seat.
- Smooth Navigation: Disagreements can be roadblocks to success. An operating agreement helps you handle disputes among members effectively, like having a reliable roadside assistance service to get you back on track quickly.
- Impress Passengers: An LLC with a well-crafted operating agreement demonstrates professionalism and credibility. It’s like giving a touch of class to your business, attracting partners, potential investors, and lenders who want to hop on board.
- Write-Up Verbal Agreements to Formalize: When you start a Limited Liability Company with your friends, many of the initial agreements are made verbally. There’s nothing wrong with drawing up your great business plan with your buddy and future business partner on a cocktail napkin.
Whatever the case, you must write up any verbal agreements in your LLC operating agreement in Texas. If you and the other party disagree about anything that was decided, the operating agreement will act as a point of reference. It will also be simpler to defend if the disagreement ends up in court.
How to Update or Change an LLC Operating Agreement
LLC operating agreements can be amended to make changes, add new provisions, or address other matters. To make changes or additions to your Texas LLC, all members of the LLC must sign the amendment in addition to the original document. After that, the master copy must be revised and distributed to all participants. Here are a few steps you can follow to update or make a change to the operating agreement LLC Texas.
- Call a Meeting: As mentioned above, all members must sign off on any operating agreements, so you need to call a meeting for everyone together from the start.
- Review the Original Operating Agreement: To learn how to change your agreement, you should review the original document. For example, the document should specify the procedure for voting on the operating agreement LLC, including who is eligible to vote and who must, as well as the required vote threshold.
- Assess The Document Point By Point: You may want members to review the document privately first. Then, you can go through the document and examine the Operating Agreement clause by clause, allowing members to highlight sections they would like to see change as you go.
- Take Voting On Proposed Changes: Put any proposed changes to a vote per the Operating Agreement’s voting guidelines. Modifications to the Operating Agreement should be made once they have been finalized (in writing).
- Review The Operating Agreement: To ensure the updated Operating Agreement reflects everyone’s intentions, all members should check it. For the updated Operating Agreement to be legally binding on every member, they must all approve it.
How Much Does an LLC Operating Agreement Cost in Texas?
The cost of the Texas Secretary of State’s operating agreement can vary depending on several factors, such as the complexity of the agreement, the attorney or service provider you choose, and any additional services you may require. Generally, there are a few options for obtaining an LLC operating agreement:
DIY Templates
You can find free or low-cost LLC operating agreement templates online. These outline a basic framework that you can customize to meet your needs. These offer a foundational structure that can be adapted to your specific requirements. You should consult an attorney to ensure the legality of your business’s documents because using a template may not cover all the details.
Attorney Services or Online Legal Services
Various online legal service providers offer customizable LLC operating agreement templates. These platforms often provide additional features, such as legal advice and customer support. The cost typically depends on the level of service and support you choose.
Hiring an attorney to draft or review your LLC operating agreement is the most comprehensive and personalized option. The cost will vary based on the attorney’s experience, location, and the complexity of your business. It’s advisable to contact several attorneys and request quotes to get an estimate of the cost.
Generally, attorney fees for an LLC operating agreement can range from a few hundred dollars to a few thousand dollars.
FAQs
Q1: Does an operating agreement need to be notarized in Texas?
A: No, your operating agreement doesn’t need to be notarized. Each member just needs to sign it. Once you and the other LLC members sign the agreement, it becomes legal.
Q2: Can I make my operating agreement?
A: Yes, but we recommend using a business template after talking to a business legal expert.
Q3: Why should an LLC with only one Member still have an Operating Agreement?
A: A single-member operating agreement can be used as evidence in court that a single-member LLC is being run as a separate legal entity. That safeguards your assets.
Q4: Does a Multi-Member LLC need an Operating Agreement?
A: Yes, whether it’s a single-member LLC or a multi-member LLC, it’s best to have an operating agreement.
Q5: Do I have to send my Operating Agreement to the state?
A: Not really. You don’t have to file an operating agreement with the Texas Secretary of State.
Q6: Where do I find my operating agreement for LLC?
A: Texas does not provide any specific paperwork to fill out when creating an Operating Agreement. Business Globalizer has a convenient template to use as a reference point as you write your Operating Agreement. This can help you cover the basic clauses that should be included in every Texas LLC Operating Agreement.
Q7: Is My Operating Agreement Public?
A: No, it’s not public but an internal document of your LLC business.
Q8: Can a non-resident open an LLC in Texas?
A: Yes, you can open an LLC in Texas as a non-resident with the help of any authorized agent.
Bottom Line
Operating agreements are essential for both single-member LLCs and multiple-member LLCs in Texas. It’s crucial to consult with a qualified attorney or legal business expert like Business Globalizer, who specializes in business law, to ensure that the agreement meets all legal requirements and adequately addresses your LLC’s unique needs and circumstances in Texas.
So, let’s face it, skipping an operating agreement LLC Texas is like playing a risky game. Don’t leave things up to chance; create an agreement that keeps your business on the right track and sets you up for success!
