Forming an LLC in Texas requires a variety of steps and requirements. One item that is not required, but recommended, is the operating agreement. In Texas, you are not legally required to draft an operating agreement, but it can be very helpful to help maintain limited liability. This agreement is essentially a set of rules. They govern how the LLC is run and provide both regulation and structure in case a situation arises between members.
What is an Operating Agreement?
The operating agreement of an LLC is an important document that outlines all the financial and functional rules for the LLC. it also dictates the regulations and what to do in case certain situations arise. It provides structure to govern the internal operations of the business to ensure the business owners maintain security.
Why Do You Need an Operating Agreement?
There are a few reasons for Texas businesses to have a documented operating agreement.
- Protect business’s limited liability status: Should your LLC be brought to court, the operating agreement can protect the limited liability status of the business.
- Clarify Verbal Agreements: Operating agreements are able to prevent disputes between members because it has been written down and agreed to beforehand. The operating agreement can be pulled up to clarify any verbal agreements as well.
- Protect Agreement in eyes of the state: Without an operating agreement, the business is governed by the rules of state law.
What Information Should You Include in an Operating Agreement?
If you are going to create an operating agreement, make sure to include the following information.
Having basic information such as the name is an essential component of an LLC operating agreement. The name should be stated clearly to be connected to the business. The articles of the organization also dictate and layout important aspects of how an LLC is run. These two pieces of information can be connected by including them in the operating agreement. You will also need to include the operational address of your LLC, as well as information about the registered agent.
In a corporation, shares dictate ownership. This is not the case in an LLC. Members can have any vested interest in the company regardless of how much they have paid. Oftentimes it is based on how much work is put into the company.
All members and managers typically have responsibilities in an LLC. These should be laid out, including day-to-day responsibilities. You should also indicate who the members and managers are. This should include their names, addresses, and titles.
Meetings and Voting
There should be a clear rule for when member meetings will be held, and how or where and when the votes will be taken. You should also include how many members are a requirement in order to vote, and how many votes are needed to officially approve any action. Some LLCs even choose to have votes based on a percentage of interest in the LLC, or simply vote my majority.
Members in an LLC do not need to be paid out in equal shares. Instead, members can have a percentage in any form. Despite this, this information needs to be laid out in the operating agreement in case of a legal confrontation in court.
Capital contributions are those that help to fund the company. This should include who contributed and the values from those companies. It might come in the form of cash, property, or services.
If there is additional capital raised, the agreement should be edited to include this. In some cases, the agreement might also state that no member is required to make more contributions, while other agreements may have this as a requirement.
Admission and Withdrawal of Members
When or how new members may be admitted should be included. Especially if a member wants to leave the company. There needs to be rules and regulations regarding what the process is, or what happens in case of expulsion.
Procedures of transferring interest
When it comes to an LLC typically all members need to agree regarding the transfer of ownership. If there is a specific procedure for when someone passes away or leaves the company, this should be outlined in the agreement.
How to Create an LLC Operating Agreement
The process of creating an operating agreement can be extensive. There are a lot of different parts that make a strong operating agreement and without one part you run the risk of losing your limited liability status. Using a lawyer can make the process a bit more bearable.