If you have decided to start a new business in Texas by forming a Limited Liability Company, then you will need a Texas operating agreement for your LLC. A Texas LLC operating agreement includes detailed information regarding the ownership of the LLC. It is a legally binding contract that helps with the smooth operation of the LLC. Not having this document while you launch your LLC could be a huge mistake that can lead to conflicts and issues that have the potential to ruin everything you have built. Confused? This article will help you understand everything you need to know about the Texas LLC operating agreement, and why you need one.
Texas LLC Operating Agreement
Owning a Texas LLC means that you will need an operating agreement. Although it is not required by the law, it is advised to have a Texas LLC operating agreement in place before you begin your business operations. This will help you in more than one way.
What is an LLC operating agreement?
A Texas operating agreement for an LLC is a legal document that is needed by every company to define how it will be operated. This document outlines the policies, procedures, and other features of the business. Without the operating agreement in place, company operations can become disorganized and chaotic. How? Well, with a Texas LLC operating agreement, everyone knows their roles, and all the processes of the company are outlined clearly. So, when trouble comes, the business knows how the situation will be handled and who will handle it.
In short, the Texas operating agreement for an LLC simply lays out the ownership of the company and its basic management structure. It includes:
- Who is a part of the company, and how much of the company do they own, in percentages
- Responsibilities and rights of all the members of the LLC
- How the profits and losses will be shared amongst the members
- Defines the management structure based on the type of LLC formed
- The amendment process
- All the rules and procedures for buy-in and sell-out situations
- In the case of a dissolution, how will the assets be distributed
- All the rules and procedures for when a member dies or leaves
Why do you need an LLC operating agreement?
Having an operating agreement isn’t a requirement by Texas law, but it has been advised to have one. So, if you are starting a Texas LLC, you should also create an LLC operating agreement. Here is why:
- The state recommends it. Yes, that is right. As per the Texas Business Organization Code of section 101.052, every member of an LLC has the choice to create and enter an operating agreement, which is also called an organizing agreement. This is so the internal affairs of the business can be regulated and the company can move smoothly in a successful direction.
- The Texas LLC operating agreement will help prevent any conflicts that may occur later on between the members of the company. If you have a multi-member LLC, an operating agreement is essential in avoiding any sort of misunderstanding between all of the members. This agreement will set out clear expectations regarding each person’s responsibilities and roles in the company.
- It will help you keep the company’s limited liability status. If you are a single-member LLC, then you may need a Texas LLC operating agreement. This will provide proof of status whenever the court questions your status as a limited liability corporation. It will also add credibility to your business as a whole.
- A Texas LLC operating agreement helps with the process of opening a business bank account. Bank managers typically ask for your operating agreement as a form of verification. So, make certain that you have added all the members’ names and addresses in it, along with the proof of ownership.
In short, it is important to get a Texas LLC operating agreement for your LLC. This agreement will outline the various roles, responsibilities, and rights of each member of the company. When you have the operating agreement in hand, everyone will know what they need to know and how to solve any disagreements that may arise. In addition to this, the agreement will convey the ownership of the company. This is important in situations when the court questions the ownership of the company. If you do not have the Texas LLC operating agreement, the court can decide who is in charge and how many shares the owner/s receives.
Types of LLC Operating Agreements
There are three main types of LLCs that are typically formed in Texas. Each of them would need an operating agreement. The three types of LLC operating agreements include:
- Single-member operating agreement: If you are a sole proprietor and are planning to form an LLC in the state of Texas as a single member, you will need to get a single-member operating agreement. Having this agreement on hand will help you maintain order in your business endeavors, and allow the management process to run smoothly. Having an operating agreement leaves no room to question what to do when an issue comes up.
- Member-managed operating agreement: A member-managed LLC is an LLC that has more than one member, and all these members manage the company together. And once more than one member is involved, it is always a great idea to list down everyone’s roles and responsibilities so that there is no confusion. Furthermore, the agreement can help in situations where there are disagreements and conflicts. Every member will have to comply with the clauses and terms of the contract, including the distribution of liabilities and profits. But remember that the agreement becomes binding only after they have signed the contract.
- Manager-managed operating agreement: A manager-managed LLC is an LLC where the members choose one person who manages the whole company. In this type of LLC, the manager-managed operating agreement offers the option for all the members to play a passive or silent role in the company’s management. Each member has a different level of experience, and their roles set in the agreement can be entirely based on this. Hence, under this structure, the role of management will be left to those who are professionals who have more experience.
What should be included in your Operating Agreement?
A Texas LLC operating agreement should have everything that the company needs to run smoothly without any blockages. It should have every role and responsibility listed, every situation and its solutions listed, the goals of the company, and so on. Here is a list of things you need to add to your Texas operating agreement for your LLC:
#1 Basic Information
The operating agreement needs to have all the basic details of the company. The information includes:
- Company’s name
- The Date of incorporation
- Your Texas registered agent details
- Duration of your LLC
- Purpose of your LLC
- Ownership in the company
- How the company will be taxed
- List all the members, their details, and how much limited liability they have
This section also needs to include the LLC membership interest, which is how much of the company someone owns. The ownership interest in the company is depicted in percentages. For instance, if there are three members in the LLC and one member, let us say member A, owns half of the LLC, then this member will have a membership interest of 50% in the company. The next person in power will be the second member, member B, who has 30% of the membership interest in the company. This leaves us with the third and last member, member C, who is left with however much ownership is left of the company, which in this case is 20%.
It should be noted that an LLC does not have shareholders, while a corporation does. In this case, they are called membership interests.
#2 Initial Contributions
Once you set up your LLC, you will have to get a business bank account for the company. In this situation, each member of the company makes a set amount of contribution that is added to this account, the company’s account. This is the capital contribution of the company. All the initial capital contributions of your company have to be listed in your Texas LLC operating agreement.
Moreover, if you complete the preparation of your operating agreement before you open the bank account, enter the amount that each member is going to add. If the amount changes, you can edit it in the agreement later on. It does not matter. The operating agreement can be edited accordingly in the future, provided all the members have approved of the changes.
#3 Tax Statements
Another important part of the agreement – is how your LLC will be taxed. LLCs have the benefit of choosing how they want to be taxed. They can choose from the following options:
- Taxed as a C-Corporation
- Taxed as an S-Corporation
- Taxed as a partnership (if there is more than one member)
- Taxed as a sole proprietorship (if there is just one member)
If a married couple opened an LLC, they could be taxed as a Qualified Joint Venture LLC. For this to happen, they will have to form an LLC in a community property state, like Texas. So, if you are a married couple opening an LLC in Texas, you can be taxed as a Qualified Joint Venture.
Add the information about how your LLC will be taxed. This is important for situations where you need to show or prove to someone that this is how you are taxed and you are following the right procedures.
#4 Voting rights
Another piece of information that you will need to add to the Texas LLC operating agreement is the rules for how each member can vote. You must add every rule and clause for the voting system in the agreement. These voting rules will depend on the membership interest in the company. If you create a member-managed operating agreement, the voting powers will be proportionate to the membership interest in the LLC.
The same is for a manager-managed operating agreement, where the voting powers are proportionate to the membership interest. After this agreement, the company manager is selected, who then has the power to make certain decisions in the company without needing the members to vote on the decision. Even though the decision power increases, the manager will still not have the power to remove or add a member to the LLC without getting the votes to do so.
How to create an LLC Operating Agreement
There are a great number of operating agreement templates online available to help you. You can also get a template from the Texas Secretary of State’s website. Once you have one, begin to fill it out with all of the necessary details.
To explain better, here are the steps to create an LLC operating agreement:
- Download the operating agreement. You can get the template from the Texas Secretary of State’s website. Then, all you need to do is add your company name to this agreement and move on to the next step.
- Enter the effective date of the document.
- Enter the company’s location along with the names and addresses of all the members of the LLC.
- If you have a multi-member LLC, enter the amount of capital that each member has initially contributed to the company.
- For the multi-member LLC, mention each member’s percentage distribution of ownership interests.
- Enter the detailed procedure for the following occasions:
- Right of first refusal
- New member admission
- Company property ownership
- Interest assignments
- Annual meeting and meeting date
- Indemnification
- Arbitration
- Notices
- Member representation
- Liquidation and dissolution
- Withdrawal events
- Amendments
- Once all of this information is provided, you must get every member of the company and the company’s representatives to sign the document. You can give a copy of the form to every member, and keep the main document on file for the company.
With this, the Texas LLC operating agreement is ready for your company.
Ready to form an LLC in Texas?
Now that you know what the Texas LLC operating agreement is all about and why you need it for your company, it is time to begin setting up your LLC in Texas. The first step is to consider a business name and register your LLC in Texas. For this, you will need a company secretary. That is where IncParadise comes in. IncParadise offers company registration, incorporation, and company secretary services. Along with this, we help with everything you need to set up and run your business smoothly, from filings, mail forwarding services, to accounting and bookkeeping services. Check out our list of services and contact us today to start your LLC in Texas!
