A Texas LLC Operating Agreement is a legal document that outlines the ownership structure of a company and establishes its procedures and policies.
Texas does not require a company to draft an operating agreement to form an LLC. However, the execution of this document is highly recommended. Company owners and members should consider filling the Texas LLC operating agreements to ensure legal protection from any litigation faced by the company.
Without a Texas LLC, operating agreement members would be held financially liable for any legal claims awarded to a claimant by a court. Therefore, the operating agreement plays a significant role in protecting the company owner and members’ assets and financial accounts. The following are Texas state statutes about a Texas LLC operating agreement:
Limited Liability Companies: Title 3, Chapter 101
Operating Agreement Laws: Sec. 101.052
State definition: Sec.101.001(1)
Types of Operating Agreement
LLC operating agreements are divided into two types. Understanding them ensures that companies apply for an LLC that best suits their membership structure. Types of LLC operating agreement include the following:
Single-member LLC operating agreement
Single-member LLC operating agreement is written for business with only one owner. This operating agreement helps separate the owner's assets from that of the company.
Download: Microsoft Word (.docx)
Multiple-member LLC operating agreement
Multiple-member LLC operating agreement is used and designed for LLCs with more the one owner. It identifies the LLC owners and the percentage of shares each owns. This operating agreement should be signed by all members indicated in the document
Download: Microsoft Word (.docx)
Benefits of Agreement
Understanding the importance or benefits of an operating agreement in Texas ensures that a company appreciates the value of the document. It also helps companies realize the impact the Texas LLC operating agreement has in its internal affairs and its response to legal issues that may arise.
A Texas LLC operating agreement offers several benefits for a company which are as follows:
Harness the flexibility
Texas has very few restrictions on the structuring of ownership and management of LLCs. The restrictions make it easy to form and maintain a Limited Liability Company with little paperwork or expenses arising from many of the state’s more complex taxes.
Flexibility relieves owners from the hassle associated with the compliance of adhering to a corporate business structure. Company owners can structure the business in ways that best suit their interests and preferences.
Bring credibility
A Texas LLC operating agreement can help establish the legitimacy of the company to third parties. It proves that the company is compliant with state and federal laws. Third parties such as banks, potential investors, tax professionals, attorneys, lending companies, and courts can request to see a company’s Texas LCC operating agreement to confirm the credibility of the company’s operations.
Formalize spoken agreements
The Texas LLC operating agreement enables company members and owners to formalize the verbal agreements. Written LLC operation agreements ensure that company owners can refer back to the contents of the documents when disputes arise.
Company owners and members can also use the Texas LLC operating agreement to prove the original agreement made on ownership structure, procedures, and policies.
Keep the state out of the business
The Texas LLC operating agreement keeps the state out of a company’s business. The company’s management structure, operational procedures, and the division of profits are all internally formulated and indicated in the LLC operating agreement by the business owner. Therefore, reference to standard laws by the state does not apply to a company with a Texas LLC operating agreement.
Protection from personal liability
Members of an LLC can use the Texas LLC operating agreement to shield themselves from any personal liability arising from lawsuits or bankruptcy of the business. This means that creditors cannot peruse the owner’s assets when demanding debt payment by the business. Therefore, assets such as the owner’s house, car, or savings account are protected.
Information to be Included
The information contained in the Texas LLC operating agreement ensures details about the company’s internal operating procedures and ownership structure are outlined in writing.
Accordingly, the following information should be included in the Texas LLC operating agreement:
LLC name
The Texas LLC operating agreement should contain the name of the business. The business name should appear as stated in the Texas Certificate of Formation. Texas state law requires company owners to add the word ‘Limited liability Company ‘or an acceptable abbreviation such as ‘LLC,’ or ‘LC’ to the official business name.
Strict restrictions on the use of names such as ‘university or bank’ have been placed in the state of Texas to avoid confusing or misleading people on the purpose the business serves.
Ownership
The owners’ names and contact information should be provided in the operating agreement. LLC owners are commonly referred to as ‘members.’ Each member’s degree of ownership should also be indicated in the Texas LLC operating agreement. A degree of ownership is the percentage of the business owned by a member.
Management structure
Information specifying the governing structure of the LLC should be provided in the Texas LLC operating agreement. Owners must state if the company’s members or managers will govern the LLC. Members can choose to take up day-to-day management positions, while others can opt to be silent investors. Therefore, a manager can be a member, and a member can be a manager.
Duties of members
The duties of each member and manager should be outlined in the Texas LLC operating agreement. A member’s duties and obligations determine what operational decision can be made without consultation with other members. Silent members should also allocate responsibilities, such as availing themselves of monthly company meetings.
Voting rights and responsibilities
The voting rights and responsibilities of each member should be clearly outlined in the Texas LLC operating agreement. There are various ways in which members can allocate votes, such as one vote for each member, one vote per unit of ownership interest, among others.
In addition, points such as adding a new member, changes in profit distribution, dissolution, or review of the operating agreement can be voted on.
Distributions
The Texas LLC operating agreement should contain information on how profits and losses should be divided and distributed. It should also indicate how other business assets such as the physical property will be distributed in the event of dissolution. A detailed distribution policy eases the process of splitting the profit and identifying the percentage each member should receive.
Tax structure
The tax structure decided on by members should be indicated in the LLC operating agreement. Members can opt to use a ‘pass through’ structure, where the tax is deducted from the profits earned by members; therefore, the company itself is not taxed. Members can also choose taxation as a partnership or corporation. Consultation with a lawyer can help members decide on which option best suits the LLC.
Holding meetings
The operating agreement may also include information on regular mandatory meetings that the LLC should hold. The state of Texas does not make this a requirement; however, it is recommended. Regular meetings attended by all members ensure vital decisions on the LLC are made and voted on.
Procedures outlining who can call for the meetings, reasons why they should be held, and who will set the agenda and take the minutes should be indicated in the operating agreement.
Buyout and buy-sell rules
The Texas LLC operating agreement should contain provisions on buyout and buy-sell rules. The provisions outline procedures to be followed by members interested in transferring their shares to someone else.
For example, most operating agreements include a ‘right to refusal,’ which means that members interested in transferring their shares should first offer them to other members under the same terms proposed to a third-party buyer.
Succession planning
Suppose an unfortunate death of a member occurs, the Texas LLC operating agreement should indicate what happens to the deceased member’s shares. Succession planning can help ensure members make updates in their estate planning documentation, such as their will and trusts. In addition, it helps members factor in a range of possibilities surrounding the death, such as if there is no named successor.
Dissolution
The operations agreement should explain circumstances that may lead to the dissolution of the company. It is sometimes referred to as ‘winding up of a company’s affairs. Decisions on the circumstances that may lead to a dissolution should be unanimous.
The Texas LLC operating agreement should lay out the dissolution procedure to be followed. The process must adhere to state and federal laws.
Modifications
The operating agreement should be reviewed yearly by all members of the LLC. The review helps establish what amendments should be made to suit the needs of the business. Updates on the document should be made when there are any financial or functional changes to the business. Procedures detailing how the modifications should be made must also be included in the operating agreement.
Severability provision
A severability provision states that when one part of a legal contract is invalid or erroneous, the remainder shall still apply. Thus, it ensures that the operating agreement is not entirely affected by one mistake. However, a severability clause should not be applied if it changes the fundamental nature of the document.
Annual Report
Texas requires LLCs to file an annual public information report and franchise tax report. The filing of the report should take place in the Office of the Comptroller. The report is meant to ensure companies keep their records up to date with the state of Texas.
The franchise tax percentage filed depends on the type of industry a business belongs to. The government uses the LLC annual report to track payment of LLC state taxes.
Operating Agreement Template
A Texas LLC operating agreement template can help guide you through the process of filling in your company’s information. Free downloadable templates help you reduce the time it takes to draft your company’s Texas LLC operating agreement. These templates are well-formatted and easy to fill. Download the template to get started with the process of formalizing your LLC operating agreement.
How to Form Operating Agreement?
Understanding how to form an LLC ensures businesses adhere to state laws during the registration of the companies. It also ensures that the businesses can distinguish which form they need to fill to register the LLC. The following is a step-by-step procedure of how to form an LLC:
Registered agent
A registered agent must first be selected. Registered agents are individuals or entities appointed by an LLC to accept tax and legal documents on a company’s behalf. The registered agents may be an individual, residents, or organizations authorized by Texas to engage in business transactions.
LLC type
Secondly, a business must apply for the right LLC type when filing with the Secretary of State. An LLC type can either be domestic or foreign. A domestic LLC is used by a company within the state of Texas, while a foreign LLC is used by a company initially formed outside the jurisdiction of the state. Each has its own separate set of forms and filing.
File for registration
Thirdly the business should file for registration of the LLC. The form filed depends on the type of LLC a company applied. For example, a company applying for a domestic LLC will file a Certificate of Formation, while a foreign LLC will apply for registration. The forms are filed online or sent via mail.
Fee
Next, the requisite fee should be paid. Companies applying for a domestic LLC will pay $300, while a foreign LLC will pay a fee of $750. A mailed application should be sent to PO BOX, 1369 Austin, TX 78711-3697.
Operating agreement
The operating agreement must then be implemented. This document is optional; however, its formation is recommended to enable a company owner to form a suitable management structure and operating procedures. An LLC can either form a single or multi-member operating agreement.
EIN
Finally, an employer identification number should be issued by the Internal Revenue Service. The employee identification number is a nine-digit code that identifies business entities operating within the United States. The IRS uses it to identify businesses for tax reporting. Other circumstances required include when an LLC is used for opening a bank account or hiring employees.
Frequently Asked Questions
Texas does not require an operating agreement; however, it is highly advised to implement it. An operating agreement can help protect members of the LLC. In addition, it helps outline how the LLC will structure the management of the business.Â
An operating agreement doesn’t need to be filed in any government agency or the Secretary of State. However, it is a vital company document and should therefore be kept with other crucial internal documents. Each member should have a copy of the operating agreement.
The cost of the LLC depends on who drafts it. If a member of the company drafts the LLC operating agreement, no cost is incurred. However, a cost is incurred if a lawyer or attorney drafts the LLC operating agreement on behalf of the members.
The operating agreement is not part of public records; it is an internal document. It provides a framework for the operations and management of the company. The decision to make the operating agreement public can only be made by the owner or members of the LLC.
The operating agreement is not the same as the certificate of formation. The certificate of formation governs external matters concerning the formation of LLC, such as the name and distinction of a registered agent. The certificate of formation helps in registering an LLC.
