Texas LLC operating agreement is a legally binding document that outlines the members’ rights and obligations in the operation, governance, and distribution of economic benefits of an LLC. The nature and appeal of an operating agreement are that you can design it the way you want.
However, there are still model operating agreements with standard terms that can be tailored to your specific needs. A good number of business persons prefer to form an LLC but leverage corporate bylaws as the operating agreement since they are more comfortable with “corporate” language.
The operating agreements could be tailored to look like a general partnership agreement. Regardless of its form, an operating agreement is a legally binding contract among its members, and courts tend to uphold it. If you do not have an operating agreement, your LLC will be governed by the Texas Limited Liability Act.
It is imperative you avoid relying on statutes because a lack of statutory guidance usually leads to litigation. So don’t place yourself in a situation where vital LLC business matters are policed by a generic statute that does not take your company’s specific needs into account.
A properly written LLC operating agreement that takes into account the personalities and visions of its members can help you avoid operational paralysis, disruption, and litigation. When you finish writing your Texas LLC operating agreement, you are not expected to file it with your state.
Keep it for your records and give copies to the members of your LLC. Following any major company event, such as adding or losing a member, it is a good idea to review and consider updating the operating agreement.
How Do You Prepare an LLC Operating Agreement in Texas?
Your operating agreement is more or less the governing document of your Texas LLC. Although not necessarily required by law, it should be considered a vital document for your business. To prepare one for your LLC, here are steps to take;
Outline Ownership Personal Details
The first step when preparing your LLC operating agreement is to write the information of all the members of your LLC. This will include their names, contact addresses, and titles. Also, take your time to determine their ownership percentages in the operating agreement.
Assign Responsibilities, Rights, and Compensation Details
Operating agreements are necessary for protecting members of an LLC. Once you are done writing each member’s information, including their ownership percentage, the next thing is to assign rights and responsibilities to each of these members. This may include voting rights, daily responsibilities, performance requirements, financial compensation, etc.
Note the Terms to Join or Leave the LLC
The next thing to consider is to create a protocol for existing or future members and also ensure they know the terms binding both situations. This section will stipulate how existing members can leave and how future members can join as well.
Make sure your terms are well-detailed and clear enough, outlining the necessary aspects of the agreement, such as what happens to such a member’s ownership percentage after leaving and the compensation when adding a new member.
Define Dissolution Terms
This is another important aspect of your Texas LLC operating agreement. Dissolution tends to happen if the members want to dissolve an LLC. Dissolution terms will stipulate responsibilities to every member whenever they may occur. When detailing the dissolution terms, make sure you include what happens to the LLC’s debt(s), members’ responsibilities, rules, and regulations, and how the company’s remaining assets should be shared.
Include a Severability Clause
A severability clause is necessary since it serves to protect the terms included in an operating agreement, especially at any point where a specific term is considered unenforceable. Conflicts between members will likely happen and you should make sure the terms of the agreement stand if one term is found to be unenforceable.
Most Important Clauses to Include in a Texas LLC Operating Agreement
If you are going to draft an operating agreement, it is imperative you include the following details and clauses.
Basic information
An LLC operating agreement will have to include basic information such as the company’s name. To be associated with the business, the name will have to be stated clearly. The articles of incorporation also govern important aspects of how an LLC operates.
By including these two pieces of information in the operating agreement, they can possibly be linked. You will also need to include your LLC’s operational address along with information about the registered agent.
Members Ownership
Shares are known to establish ownership in a corporation. But in an LLC, members may have a significant stake in the company, regardless of the amount or the capital invested. It is more or less based on how much work would be put into the company.
Responsibilities
In an LLC, all members and managers have different roles and responsibilities. These should be outlined, including daily responsibilities. You should also identify the members and managers by their names, addresses, and titles.
Meetings and Voting
There should be an understandable rule for when members’ meetings will be held, how or where, and when the votes will be taken.
You should also specify the number of members required to vote and the number of votes necessary to formally endorse any action. Several LLCs insist on having votes based on a percentage of the LLC’s interest, rather than voting by a majority.
Profit Distributions
Members of an LLC are not required to be paid in equal shares. Members can have a percentage in any form. Regardless, this information will need to be included in the operating agreement in the event of a legal battle in court.
Capital Contributors
Capital contributors are those that help to fund the company. This should include who contributed and what those companies stand for. It could take the form of money, property, or services. If there is additional capital raised, the agreement will need to be adjusted to include this.
The agreement may state that no member is required to make more contributions, while other agreements may have this as a requirement.
Admission and Withdrawal of Members
Your Texas LLC operating agreement will also need to include when and how new members may be admitted or withdrawn. If a member wishes to leave the company, there must be rules and regulations governing the process and what happens in the event of expulsion.
Procedures for Transferring Interest
When it comes to an LLC, all members must agree on the transfer of ownership. If there is indeed a specific procedure in place for when someone dies or leaves the organization, it should be specified in the agreement.
Conclusion
An operating agreement outlines the expectations for all members of an LLC, their roles, rights, and responsibilities. Note that by putting together your operating agreement early, you guarantee that all your business members are clear about who will do what and how disagreements or conflicts of interest will be solved.
Your members can write an operating agreement, which is free. You could, in addition, have an operating agreement crafted by a business lawyer who will charge for this service.