LLC Operating Agreement Texas | The Complete Guide


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Starting an LLC may involve filing articles of organization with the state and establishing internal ground rules for how your business should operate. Establishing your credibility as a legal entity is a part of the plan.

Every LLC in Texas is encouraged, but not required, to have an operating agreement to safeguard the company’s operations, from organization to dissolution. It ensures that all LLC members understand their roles and responsibilities. This page guides you in making a Texas operating agreement.

Texas LLC Operating Agreement Content

An operating agreement is a legal document detailing the LLC’s organizational structure and operational procedures. Topics not restricted to a single member or multi-member LLC will be covered. While these provisions might not influence day-to-day operations, they must be included for legal reasons.

  • Ownership: The operating agreement details who the members are and how ownership is divided, be it a sole proprietorship or LLC. Sole proprietorship refers to a single person with total control over a business, also known as a single-member LLC. Multi-member LLC members can have either equal or varying ownership interests.
  • Management: Your LLC could be member-managed or manager-managed. The former means members can decide regarding contracts with third parties; the latter means only designated managers can do so. Using “manager-managed” instead of “hands-on” can reduce administrative work. Management’s authority is also limited in the Operating Agreement. 
  • Voting: Define each owner’s voting rights and voting thresholds, such as a majority vote, supermajority vote, and unanimous consent. A variety of approvals are needed for each type of decision.
  • Changes in Membership Structure: If someone leaves the company, how will roles and ownership be transferred? A member buyout and/or replacement procedure must be outlined in the LLC’s governing document.
  • Contributions: All types of contributions are accepted. In order to fund their ownership interests, members will have to invest in the collective funds.
  • Equity Splits: Determine equity for each member, taking into consideration things like their contributions, responsibilities, and fairness. Maintaining fairness in your equity split will help prevent future disagreements.
  • Transfers: You may want to consider outlawing transfers of ownership interests without the consent of all owners. It’s always a good idea to include permitted transfers, such as first refusal, drag-along rights, tag-along rights, and estate planning transfers.
  • Business Restrictions: To protect the privacy of the company, including confidentiality obligations. You may also ban the owners from owning competing businesses.
  • Intellectual Property: Detail; the ownership of intellectual property created by members. Make sure all company-created intellectual property is owned by the company. You can find alternative ownership/license structures if necessary. 
  • Taxation: Determine how you will be taxed and plan accordingly. Remember, however, that you must file an LLC annual report and might be required a sales tax. 
  • Guaranteed Payments: Determine if any of the members should receive Guaranteed Payments, which are like a salary, particularly if your LLC is taxed as a partnership.
  • Distribution & Dividends: Explain to all members how the funds will be allocated. A pass-through entity will impose tax distributions regardless of profit distributions.
  • Dissolution: The LLC should be dissolved if all members elect to cease operations. It is important to identify how you will end your business in your operating agreement.

Note that the operating agreement, though not a legal requirement in most states, is vital in the operation of your LLC. Should your members have issues with the business, you can deal with it with guidance from the operating agreement.

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Developing an operating agreement could be tedious at times. Besides, since it deals with how your business operates, then it would be best to have professionals help you with it to make sure you get everything right. Getting help from registered agents would be your best bet. Here are three of our best LLC services that can provide you with registered agents to free you of worries:

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Importance of a Texas LLC  Operating Agreement

Texas does not require you to create an operating agreement when you have an LLC. The majority of states require that all businesses be incorporated in order for them to verify the business structure. You can skip this step in Texas and the LLC is not subject to any legal penalties.

However, this is an essential step to ensure that the business, as well as its owners, are protected from any miscommunications. Here, check out some of the reasons why you should draft this agreement for the LLC. LLC,

  • To protect the business Operating agreement: It sets out the rules for LLC. If the members fail to follow the rules and the operating agreement is not followed, it will govern the operation of the LLC. This agreement could be used to protect the LLC from being governed by the government’s rules and offer additional advantages.
  • An LLC makes it look trustworthy when investors look at companies they always evaluate how professional the company looks. Operating agreements make an LLC professional. It indicates to the members that they are concerned about the business. They want all the regulations and rules to be legally binding. This helps in expansion by attracting investors.
  • For the LLC to be legally valid: LLCs enjoy limited liability status. Operating agreements must clearly define this to ensure that the government does not misunderstand. Although it’s easy to mistakenly connect a single-member LLC with a sole proprietorship, an operating agreement may help clarify the differences.
  • To settle any conflict: In future, there could be conflicts arising from the decisions and distributions. The operating agreement outlines the requirements and procedures for each employee of the business. It allows the company’s members to review the specifics of the operating agreement and proceed with their work if they feel the need.
  • LLC flexibility can be helped by Limited Liability Companies. Limited Liability Companies are required to be flexible since it is a part of their nature. Operating agreements allow these LLCs to have this type of nature. The legality of an operating agreement grants the LLC with freedom.
  • To open bank accounts in your business, you will need to provide a copy of the operating agreement. At the moment when a business does not have that, it will be difficult for the business to establish an account with a bank.

How to Edit Operating Agreement of LLC in Texas

Operating Agreement of LLC in Texas can be edited when all the members agree to the amendment(s). You do not need to file it with the state.

There are several steps you can take to change the operating agreement of your LLC. You should first discuss the changes with other members of the LLC. If you get unanimous consent, then you can amend the agreement. The amended agreement can be used for future decisions. If you do not want to change it, then do not do it. But, before you do anything, you should make sure that you understand all of the procedures and legal implications of such changes.

The operating agreement outlines the rules of voting for the LLC. In an LLC managed by a manager, the voting powers of the members are proportional to their ownership percentage. The Manager is elected by a majority of the members. Moreover, the manager has most of the authority to make decisions for the LLC. When you want to add a new LLC Member, you have to get a majority vote from the other members. If you don’t have a majority, you can always elect another member of the LLC.

The Operating Agreement should clearly define the roles of each member. For instance, if each member holds 50% ownership, then he or she should deposit the same amount of money to the company’s bank account. If the members hold 70/30 ownership, then the amount of money they contribute should be proportionate to their percentage of the LLC’s capital. Also, make sure that the Operating Agreement specifies the tax treatment of these contributions.

The operating agreement should provide the method of acquiring an LLC’s interest. It should also stipulate that the initial members of the LLC must contribute capital to the company. This initial capital can be cash, property or services. In addition, the operating agreement should also define if the initial members are allowed to add additional capital. Sometimes, owners may want to amend or change other provisions. If you find a provision that you are not happy with, you can always prepare a new operating agreement.

When amending the Operating Agreement, make sure that you notify the appropriate government agencies. Most states require notification whenever there are changes in the number of members, ownership percentage, or management. Additionally, you must update the records of the management with the secretary of state. However, if you want to change your name or address, you should amend your Articles of Organization as well. And don’t forget to file any amendments with the Comptroller of Public Accounts.

You can add or remove a member in an LLC by amending its members. The members created the Articles of Organization and Operating Agreement. It is important to remember that they must be amended together. If you remove a member, you must also amend the Articles of Organization. This is the first step in changing ownership. To change ownership, you must amend both documents. Then, you can add a new member and make your LLC multi-member.

F.A.Qs

Does Texas require an operating agreement?

In order to clearly state the purpose of a business as well as its ownership interests, a written operating agreement is strongly advised in Texas.

What if an LLC has no operating agreement?

You and other members of the LLC will be unable to reach any agreements if you do not have an operating agreement. Even worse, your LLC must follow the state’s default operating conditions.

Can I write my own operating agreement?

It is required by law in California, New York, Maine, and Missouri, but it is not in Texas. Although it is not legally required, creating a written agreement is strongly advised. You may self-notarize and distribute the documents.

In Conclusion

The operating agreement is an important document for your Texas LLC. However, it is not mandatory to file in many states. It is strongly recommended to file the operating agreement even if it is not required in your state. Get a professional LLC service to file your operating agreement properly.

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