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Texas LLC Operating Agreement
Texas is considered one of the best places to do business in the US. This is evident from the notable trend of major companies relocating to the state. Renowned firms like Amazon, Hewlett-Packard, Oracle, and Tesla have all chosen to move from their original states to take advantage of the favorable business climate and opportunities that Texas offers.
Doing business in Texas, however, requires you to have more than a good name and essential products and services. Your company has to be stable and capable of weathering all sorts of challenges, both within and outside. One of the things your company needs to have in order to function properly and last long is a document called an Operating Agreement.
What Is An LLC Operating Agreement?
Before discussing what an LLC Operating Agreement is, let’s talk about what an LLC is first.
The acronym LLC, which stands for Limited Liability Company, is a business type that combines the best things from other business types. It is easy to form and register with the state like a sole proprietorship but has the protections afforded by incorporated businesses. This makes LLCs the most popular business type among SMBs in Texas.
In order for a Texas LLC to run as intended, it has to have certain guidelines all owners need to adhere to. These rules and regulations are customized to meet the business’s purposes and needs and must be strictly followed by all of the LLC’s members. These are written and placed in a document called an Operating Agreement.
Definition
Operating Agreements are internal documents created to provide LLC members with instructions on how the LLC is meant to operate. It serves as a handbook that contains all the necessary details about the LLC, such as what the LLC is about, who its members are, what each member does for the company, and how the members benefit from the business.
The document also contains instructions on how certain things are handled within the company. It provides instructions regarding internal communications, details regarding the distribution of profits and losses, and what the company must do in case disputes arise. The document also includes guidelines for when the company is going to be dissolved.
We consider Operating Agreements as something similar to the Articles of Incorporation used to establish an LLC, as they both outline how your business will be managed. The key distinction lies in the fact that Operating Agreements don’t require submission to the Secretary of State for approval.
Does Texas require all LLCs to have an Operating Agreement?
Texas does not require you to have an Operating Agreement before forming your LLC. Lawyers, however, all agree that you need to have one for your business’s sake.
An Operating Agreement makes it easier for your LLC to function. It will help ensure your company’s limited liability status with the state and the courts. The document also helps keep your members accountable, avoid potential disputes about the company’s operations and finances, and resolves issues before they happen.
What Are The Advantages Of An Operating Agreement In Texas?
Creating an Operating Agreement for your Texas LLC will provide you with the following benefits:
A reinforced limited liability status
An Operating Agreement helps your LLC protect the personal assets of its members from lawsuits. It acts as a formal document separating your company from you and other members. This strengthens the impression that your company is indeed incorporated—even if you’re the only member—and reinforces its limited liability status in the eyes of the courts.
Added clarity on how your company does things
Your Operating Agreement is designed to help provide more clarity in the way your company does things. It includes instructions on how to schedule and handle meetings, how to manage finances, including distributing profits and losses, how to solve disputes when they arise, and more. The guidelines included in the document make it easier for each member to function according to their roles and responsibilities as well.
Improved accountability among members
Once signed, your company’s Operating Agreement becomes a binding document containing rules and regulations all members need to follow. Because they agreed to all the instructions and provisions outlined in the document, they can be held accountable for any violations they make. This helps cultivate fairness among the relationships inside your LLC, regardless of how many its members may be.
More control over your company
LLCs, by default, will be governed by the rules in the state they are registered. The same goes for your LLC in Texas. You can avoid this and manage your company according to your preferences by creating an Operating Agreement for it.
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- Digital signatures
- Agreement amendments
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What Are The Limitations Of An Operating Agreement In Texas?
Your Operating Agreement provides your company with these benefits, but it is in no way a one-size-fits-all solution for your business. It solidifies your limited liability status but cannot prevent lawsuits from being filed against your company. While it can help you settle internal disputes, it cannot prevent all such events from happening. It allows you to keep the state rules at bay but doesn’t allow you to contradict any laws. And lastly, while it is binding and enforceable against violations, your LLC’s members still have the freedom to follow it.
What Should You Include In A Texas LLC Operating Agreement?
Your Operating Agreement must be customized to suit your company’s needs. It must cover all the bases so that your business can function the way it is intended to until it is dissolved in the future. Details for everything must be placed in the document so all members can read and agree to them by affixing their signatures.
When creating your Operating Agreement, make sure to consider your business purposes, company size, your LLC’s members, your potential clients, and your personal preferences. To create a good Operating Agreement for your LLC, you must include the following:
Information about your LLC, including its business purposes
Information about your LLC’s membership
Your LLC’s Management Structure
Details on distribution of Profits and Losses
Details about Meetings and Voting Procedures
Details about Record Keeping and Financial Reporting
Details about Limitation of Liability and Indemnification
Details regarding Dissolution and Winding Up
Instructions for Resolving Disputes
How To Form An Operating Agreement
Forming your LLC’s Operating Agreement isn’t that hard, but you’ll need to carefully consider all the details you include. You can create one yourself by following our tips below.
Information about your LLC
Make sure your Operating Agreement contains vital information that identifies your LLC. This info should match what you included in the Articles of Incorporation when you formed your company with the Texas Secretary of State.
The details you need to provide include things such as your LLC registered name, address, as well as its Registered Agent’s name and address. You will also need to specify your LLC’s purpose for existence and what you intend to do with it once it achieves its purpose. LLCs typically get dissolved once they achieve that.
Information about your LLC’s membership
Additionally, your Operating Agreement should include details about your LLC’s owners, such as their roles and responsibilities. This is crucial for establishing guidelines for the people who are part of your company’s formation, their contributions, and how operations are overseen.
It should include the following:
- The members’ names and addresses
- Their roles and responsibilities
- Guidelines for adding new members
- Guidelines for transferring membership
- Guidelines for withdrawing membership from your LLC
- Members’ capital contributions and ownership percentages
Your LLC’s Management Structure
Next, you must also specify what type of management structure your LLC has. There are two types:
- Member-managed LLCs, where the members are the ones actively managing the business
- Manager-managed LLCs, where the members take a more passive role and entrust the management of the business to a manager they appointed for the task
Details for Profit and Loss Distribution
Your Operating Agreement should also outline how profits and losses will be divided among members, usually based on their ownership percentages. Clearly, specifying these details can prevent any future misunderstandings on this important matter.
Meetings and Voting Procedures
Your LLC’s members are bound to hold meetings for many reasons, primarily to provide updates on how the company is performing, as well as to discuss membership issues. To this end, also include the following in your Operating Agreement:
- Details about organizing, scheduling, and conducting meetings
- Instructions for informing all members about meetings
- Guidelines on rescheduling meetings
- Details about all members’ right to participate in decision-making for the company
- Details about voting and details about the vote-counting process
Details for Record Keeping and Financial Reporting
Your Operating Agreement should clearly state the need for accurate record-keeping and transparent financial reporting. This builds transparency and trust within the company. Include details about your company’s accounting and record-keeping processes, your company’s fiscal year, and how your LLC elected to be taxed by Texas.
Details about Limitation of Liability and Indemnification
Your Operating Agreement needs to spell out how your LLC’s members are protected from its obligations, ensuring limited liability. Additionally, include clauses for indemnification and insurance coverage for members, if applicable.
Details about your LLC’s Dissolution and Winding Up
LLCs are usually dissolved when their goals are met or for various reasons. Because of this, it is necessary to include instructions on how your company will handle dissolution. Include details about winding up, which means settling affairs before closing the company. This ensures a clear process for ending the LLC if needed.
Instructions for Resolving Disputes
Finally, guidelines on handling disputes should be included as well. Disagreements can arise, and having clear procedures for resolving them will help prevent conflicts from escalating. An Operating Agreement will help you resolve issues when they appear.
Why is an operating agreement needed?
Enforceable in Court
The terms outlined in a written LLC operating agreement is usually enforceable in a court of Law.
Opening Bank account
Certain financial institutions require you to produce an operating agreement to verify whether you have “signing power” for the LLC.
Avoid disputes
If the terms of compensation, roles, and responsibilities are mentioned in the operating agreement, it avoids disputes among LLC members in the future.
Preserve limited liability status
Especially if you are a single-member LLC, having an operating agreement helps ensure your liability status is upheld in court.
Create a customized operating
agreement now!
- Digital signatures
- Agreement amendments
- Multiple versions
Frequently asked questions
No, LLCs do not need an Operating Agreement to start doing business in Texas. This is regardless of the number of members owning them. The document, however, is a must-have for the business’s operations.
No. Operating Agreements do not expire. They typically last as long as the LLC continues to exist. However, LLCs can make changes to them if all members approve the said amendments via voting.
An Operating Agreement is sometimes referred to as a “company agreement” in the state of Texas. Regardless of what the document is called, its purpose remains the same.