Limited liability companies (LLCs) are forms of private limited companies whereby the member’s or the partner’s liability towards the company is limited by his/her financial contribution. LLCs often enter into LLC operating agreements (operating agreements) to create a binding contract between the members involved in the company and the company itself.
This contract governs important financial, business, and operational concerns of the company. There are no legal provisions that specify the structure with which the operating agreement should be drafted.
More specifically, it is not mandatory under law to sign an operating agreement, however, it contains important provisions for the governance of the company and hence it is a norm for the members of the LLC to create such a contract.
What is a Texas LLC Operating Agreement?
A Texas LLC operating agreement is a key document which outlines the operational and financial terms of the limited company incorporated in the state of Texas. It is drafted as per the needs of the business owner or the members of the Texas incorporated LLC.
The document is usually executed between the members of the LLC (in case of a multi-member LLC) or the sole member of the LLC and the entity itself (in case of a single member LLC). It acts as a legally binding document. There is no requirement that the members must belong to the state of Texas itself.
A Texas LLC Operating Agreement will be governed by the laws of the state of Texas, United States. The operating agreement need not be filed with the state or notarized.
When Do I Need a Texas LLC Operating Agreement?
An operating agreement in the state of Texas must be signed after the incorporation of your LLC. However, such a document does not need to be filed with the other documents required for the incorporation of the LLC, nor does it need to be disclosed by you to the public.
It is important to note however, that states such as Delaware, Maine, California, New York and Missouri do require an LLC to have an operating agreement. However, in the state of Texas, there is no such requirement.
Practically, it would be wise to discuss the terms of such an operating agreement with the members prior to the incorporation of the LLC and begin negotiating the agreement at an early stage.
What Is Included in a Texas LLC Operating Agreement?
An operating agreement will generally include terms such as:
Structure of the Company:
A few standard clauses pertaining to the purpose of the company, the number of members, the method of incorporation of the company will be mentioned at the beginning of the operating agreement.
The registered address of the company in the state of Texas will also be mentioned with the agreement.
Percentage of Ownership:
The percentage of the contribution of the members as well as the methods by which to distribute profits and losses will be provided in the agreement. It is important to include such a clause within the Texas operating agreement as without it, the courts or the laws in Texas may automatically distribute losses and profits equally, regardless of the contribution of the members.
Important decisions governing the operation of the company, such as allowing a new member to enter the LLC or to create a mortgage on certain properties etc. which are major decisions for the LLC to undertake, require a clause which stipulates the voting rights of the members in the company.
Clauses pertaining to the methods by which the meetings (how often will the meetings take place and its rules) will also be included in the operating agreement.
Dissolution of the Company:
The rights of the members upon the dissolution or winding-up of the company will be provided.
The following points must be kept in mind:
What is the consequence of not entering into an operating agreement?
First, if you do not enter into an operating agreement, then the state of Texas default rules for the governance of the LLC will apply. As mentioned earlier, the courts may then require an equitable distribution of the profits of the company, regardless of the contribution of the members.
Second, the company will not be equipped to deal with a misunderstanding regarding finances and management of the company in the absence of an operating agreement. Since, the operating agreement can be drafted to accommodate the views and interests of the business owner and the LLC it would be advisable to ensure that such an agreement is entered into.
Is it necessary for me to enlist a lawyer for an operating agreement?
Minor modifications to an operating agreement, such as a change in the address or any change in the ancillary clauses to the agreement does not necessarily require the assistance of a lawyer.
However, in instances where more important clauses have to be changed, such as the removal or addition of a member, then the assistance of a lawyer will be required.It is always advisable to consult a lawyer specialised within the state of Texas itself.
Operating agreements in the state of Texas act as the middle ground which ensure the interests of the company by creating guidelines for its day to day operation. They also provide benefits to members for their contributions to the company and ensure that their personal assets are protected.
Therefore, it is important to draft the most suitable and appropriate operating agreement for a Texas incorporated LLC.
CocoSign has templates for different Texas LLC Operating Agreements along with templates for different LLC Operating Agreements as well.
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