Texas LLC Operating Agreement: Why and How to Get One

Is an LLC operating agreement required in Texas?

The Texas Business Organizations Code (BOC) doesn't insist on Texas LLCs having a written operating agreement, but the state courts do honor valid operating agreements (Tex. Bus. Org. Code § 101.001).

An LLC operating agreement is a useful legal document that cements the limited liability status of a company, comes in handy in times of misunderstandings, and helps in carrying out the business according to the rules set by the LLC owners.

Benefits of having a Texas LLC operating agreement

Operating agreements help clearly define business arrangements when there are multiple parties involved in the LLC, but how about single-member LLCs? Regardless of whether your LLC is a team or a one-person-show, having your own LLC operating agreement establishes credibility and clarity—especially for investors.

• Provides legal protection. LLC operating agreements reinforce the difference between individuals and the company, thereby boosting personal liability protection. They prove that your LLC is indeed a distinct legal business entity so your personal assets, such as personal savings or a house, are shielded from company debts and liabilities.
• Clarifies verbal agreements. In multi-member LLCs, there could be a misunderstanding between members regarding the company's procedures or profit-sharing protocol. A Texas LLC operating agreement assists in formalizing verbal agreements between members so everyone knows the rules
• Provides operational guidance. Operating agreements add structure, especially in the early days of the company’s operations. They guide decision-making and profit allocation processes and outline management responsibilities. Oftentimes, this internal document also provides a dispute resolution method.
• Assists in banking and financial transactions. Financial institutions, like banks or lending companies, may require an operating agreement to verify the LLC structure and ownership details before approving a loan. In cases of significant financial investment, an investor may want an operating agreement to understand the management structure, decision-making process, and how allocated funds will be used.
• Overrides state's default rules. Texas state's default rules, which are quite general, govern LLC dispute resolutions if there is no operating agreement in place. These rules may not serve the business interests of the members. For example, say two business partners make equal capital contributions toward an auto repair business. However, one actively manages the shop while the other is more of a silent partner. If both partners decide to dissolve the company and they don't have an operating agreement, Texas law will distribute the profit equally amongst the two. In an operating agreement, the partners could agree to a different profit distribution that would be recognized by the court.

Key components of a Texas operating agreement

The Lone Star state doesn't have any "must-haves" for a Texas operating agreement—you are free to include whatever you deem as fit (as long as it falls within the law). However, a well-defined and thorough operating agreement covers the following topics:

Company formation details

This section of the Texas LLC operating agreement contains basic information about your business.

• Legal business name and principal address
• LLC formation date (if you already filed the certificate of formation with Texas Secretary of State)
• Business' purpose
• Registered agent name and contact information
• How will LLC be taxed—as a pass-through entity, a C corp, or an S corp?

Member details and initial capital contributions

This part of the agreement deals with matters related to members and membership interests, including the admission of new members. The majority of operating agreements include details about all the initial members and their individual capital contributions to form the Texas LLC. This helps determine each member's LLC ownership interests—which is often expressed as a percentage. 

It’s also common for an LLC operating agreement to include a provision that states that a member’s liability is limited to the amount of the member’s contribution. Some agreements also include clauses on how future capital contributions can be made.

Management structure and member responsibilities

What’s the governance structure of your business—is yours a manager-managed or member-managed LLC? As per Texas Business Organization Code, managers can be members but members don't necessarily have to be managers.

Alongside structure, each member's duties and obligations should also be laid out. Let's say you are a member and manager responsible for running the company on a daily basis, while the other member is more of a silent or supportive partner who contributes funds. These terms should be specified to reduce future conflicts.

It's also essential to address legal matters, such as:

• Which operational or financial decisions can be made without asking the silent members?
• Are the silent members obligated to attend monthly or quarterly meetings, etc?
• Who has the legal authority to represent the company?
• How will managers be chosen?
• Which members can access sensitive company information?

Voting rights

The business structure also influences voting rights. In both manager-managed and member-managed LLCs, voting rights are often proportional to ownership interests. For instance, if you own 70% of the business to another's 30%, you would get seven votes to the other member's three votes.

Remember to include which issues need to be passed through a vote. It's common for LLCs to vote before adding or removing members, changing tax structure or accounting methods, or altering the profit distribution process.

Profit and loss distributions

Probably the heart of the operating agreement is how profits and losses will be divided amongst members. This section should detail how members will get paid after all expenses are taken care of. For instance, can a member write a check from the LLC bank account to their personal bank account? The operating agreement should specify how and when money can be removed and distributed. Similarly, if the company encounters losses, highlight how those will be split.

Compensation

Address how out-of-pocket expenses will be reimbursed. For example, if one of the members is particularly handy and agrees to build a shed to store business equipment, all other members will vote on a fair rate to pay for their time and service.

Transfer of membership interests

As time passes, members may move on to other ventures, and the LLC operating agreement should lay out the buy/sell process. If, for instance, a member wants to buy out the ownership interest of another member, the operating agreement should mention how and when they can do that. There can also be a "right of first refusal" clause that mandates an exiting member to first offer their stake to an existing member before going to a third party.

Likewise, the agreements should also mention the process as to how a member can "cash out" or sell their stake in the LLC to another person. Many agreements also offer direction on how new members must be approved by existing members.

Taxes and bookkeeping method

Clear bookkeeping methods can help ensure financial transparency and consistency, simplify compliance, and make it easier to track the company's financial health. Your chosen accounting method also plays a role in the LLC's tax liability.

LLCs have flexibility in choosing their tax classification (pass-through entity, C corp, or S corp). Specifying how the LLC will be taxed makes it easier for all members to understand their tax obligations and file correctly.

Succession planning and dissolution procedures

We know you don't want to think of the end when you are just getting started. However, it's best to be prepared for events rather than surprised. Many events can lead to the business shutting its doors, from a market change to bankruptcy to a key member leaving or passing away. 

Your operating agreement should include dissolution provisions, like requiring all members to agree to the dissolution of the company, outlining steps that must be taken to wind up the business, and specifying how any remaining assets will be allocated after all debts and expenses are settled.

It's also beneficial to mention what will happen to a member's ownership percentage in case of their death or incapacity. Will their stake be passed on to a family member or a listed beneficiary, or will the business dissolve?

How to create a Texas operating agreement 

The following steps can serve as a point of reference for creating a robust Texas LLC operating agreement.

Step 1: Gather member information

Member information is one of the core pieces of an operating agreement. Collect all pertinent member details before you draft an agreement, such as:

• Legal names as listed on government-issued IDs
• Contact information, such as telephone and mailing address
• Capital contribution, including date of contribution and form (cash, property, or services)

Step 2: Decide on the management structure

You must specify a management structure in your operating agreement. This information must also be mentioned in the certificate of formation submitted to the state to officially gain limited liability status for your business. A business attorney can help you decide between a member-managed and a manager-managed LLC.

• A member-managed LLC is where all members actively have a say in the daily management of the company. Each member can legally represent the company before the courts, customers, vendors, and lending authorities.
• A manager-managed LLC is where a designated manager(s), like a CEO or COO, is responsible for running the daily show, while members retain more of a behind-the-scenes or passive presence. The majority of the daily decision-making authority rests with the managers, while members can step in for their expertise or intervene when there are changes in management ownership or structure.

Step 3: Draft the agreement 

Writing an operating agreement from scratch is a mighty task. One small error can have big implications, especially if the agreement is breached or contested. That’s why it's advisable to draft the limited liability company agreement with the assistance of an attorney.

Step 4: Review and revise

Set aside ample time for all members to review the document. If there are any discrepancies or questions, address those and revise the document so it meets everyone's expectations and best interests.

Also, if you have drafted the agreement yourself, now would be a good time to get the document reviewed by a legal expert to ensure clarity and adherence to Texas state laws.

Step 5: Sign and distribute

Get all members to sign the finalized agreement. Ensure the original and a copy are stored alongside other crucial business documentation like the certificate of good standing and the certificate of formation. Also, consider providing each member with their own copy for personal records.

Get a Texas LLC operating agreement with LegalZoom

While Texas law allows you to create your own operating agreement, there's a lot riding on this document. Confusing verbiage or oversights can result in unfavorable outcomes or legal disputes.

Rather than relying on a free operating agreement template that may not align with your business goals or member structure, consider using LegalZoom. You can get a custom, attorney-reviewed document through our standalone operating agreement service, or connect with an attorney through our Business Legal Plans for ongoing support. We will help you make sure your company's internal affairs are structured, protected, and adaptable for business growth.

FAQs

Does a single-member LLC in Texas need an operating agreement?

We'd advise that even if you are the only person in your company, you should get an operating agreement. It will provide clarity to operations while protecting your personal possessions from business liabilities. A single-member LLC operating agreement can be used to prove in court that you are the sole owner of the business and, therefore, the only person in charge of company-related decisions.

Can I change my operating agreement after forming my LLC?

Yes, you can alter your original operating agreement. Generally, the process for making amendments is stated in the operating agreement. It could be something like getting a majority vote before changes are implemented. 

If no process is mentioned, you can start by calling a meeting to discuss matters and gain mutual consent to make the necessary changes. You have the option to incorporate the changes into your original operating agreement or draft a separate amendment agreement that works alongside the original LLC agreement. Just remember, all members must sign the updated Texas LLC operating agreement or the amendment agreement.

If there are changes to any details stored in state records—such as registered agent information, LLC name, or primary mailing address—you must inform the Texas Secretary of State by completing a certificate of amendment form.

Does a Texas operating agreement need to be filed with the government?

No, Texas state statutes don't require an LLC's operating agreement to be filed with the Texas Secretary of State office. Instead, they recommend you securely store this legal document with other business records.

Can I write my own operating agreement?

Technically, you can. But there's so much riding on this document that it's best to get a legal professional to draft your Texas LLC's operating agreement, or at least review it. LegalZoom's operating agreement service is an excellent and affordable way to safeguard your assets while laying the ground rules for your business.