Texas LLC Operating Agreement Explained
Therefore, for the reasons mentioned above, we regularly plead in our LLC formation documents that the Texas LLC Operating Agreement is a binding agreement on each of its terms on each of the members, and the LLC should be operated in accordance with those terms. In the same vein, we recommend that, regardless of the simple provisions that are specifically required by statute, that any LLC’s operating agreement elaborate upon a multitude of terms and conditions that will govern the LLC and the relationship between the members of the LLC including the members’ expectations of other member’s actions and their agreed motivations in forming the LLC, and also how their relationship between the members is to be handled. The goal of and the need for an LLC Operating Agreement, no matter how simple or detailed, is that the Operating Agreement sets forth the expectations of the members of the LLC when they have a difference of opinion on any issue related to the LLC . For instance, if the members have differing opinions when it comes to decisions concerning the expenses of the LLC, and if those differences cannot be resolved between the members, exactly how and who will resolve those issues? Will the decision be made by majority vote? Or can a member block the other(s) from making any further expenditures without their express permission? Can one member obligate the LLC to a long-term contract, or can they incur short-term expenditures for the LLC without anyone else checking on them? Without an Operating Agreement – because the Texas LLC Act does not address many of these issues (except in a few instances), the law is silent on them. Consequently, without an LLC Operating Agreement, Texas law implies your answer to these questions as it sees fit – which may not be what any of the members wanted.
Essentials of a Texas LLC Operating Agreement
The essential part of an operating agreement is the members. Does the LLC have one member or more than one member? Are the members individuals or entities? Are the memberships themselves equal to one another or will there be classes of membership (i.e., various non-equal shares of the profit or loss)?
Next, are there any managers for the LLC? You can have members who are not managers. Instead, those members delegate their management authority to other individuals or other entities. On the other hand, you can have no managers at all and the members themselves manage the LLC. For many, though, it is preferable to have managers to run the day to day operations of the business, rather than have the members running the business.
Finally, you need to address how profits and losses are distributed among the members. In a Texas LLC, all distributions of profits and losses must be done according to the membership percentages unless the operating agreement says something different.
Advantages of a Texas LLC Operating Agreement
The operating agreement for a Texas LLC is precious protection for your company. It provides rules and procedures that keep things on track should things get complicated. It also provides important legal protection regarding arbitration of LLC internal disputes.
Operating agreements act as your protection from court intervention. Generally, the courts will only intervene if the parties have been through arbitration. Should an LLC member bring a suit against another member, they need to exhaust the internal processes laid out in the operating agreement before they can involve the courts.
It’s not uncommon for conflict to erupt in LLCs, causing problems. Some conflicts are minor, but others can threaten the very foundation of that LLC. Operating agreements provide members with a way to settle their differences and work towards a resolution. The agreement will lay out the steps needed to ameliorate any dispute. Usually, the agreement will require informal dispute resolution, such as negotiations. If the dispute is still ongoing and unresolved, the agreement will typically call for more formal procedures, such as mediation or arbitration.
Growth within your business can cause the original operating agreement to feel fuzzy. Clarity is necessary, and the operating agreement provides that. All business owners can’t help but change and grow, so operating agreements allow them to adapt with the changing world.
How to Draft a Texas LLC Operating Agreement PDF
A Texas LLC operating agreement can be downloaded, completed using a PDF-editable application, or printed and then filled out using a pen. Another option is to use an application like Adobe Acrobat to create and save interactive forms in PDF format. A client can use such a form to fill out the operating agreement and then save the completed document without requiring the lawyer’s assistance.
Some of the information included in the printable PDF form will need to be completed following the review of the final draft of the operating agreement. For example, the content might require a corporate seal or witness signatures, or simply the client may prefer the form to be printed, signed, and then saved as a PDF.
We offer the operating agreement written in Word format (in the downloads section of this site) and the completed and saved PDF version that is usually used. Once the client has hired us and pays for the final review, we email the document to them. We then provide them the completed PDF version. A Texas LLC operating agreement PDF can be viewed, printed, or altered depending on the operating system and PDF software available.
Free Texas LLC Operating Agreement Forms vs. Paid Forms
The cost of a Texas Limited Liability Company (LLC) Operating Agreement can vary quite dramatically. There are "free" templates online and various paid options. Either way, the end result for most small business owners that will be entering into a Texas Limited Liability Company (or "Texas LLC") is that they’ll have a legal contract to sign by the Texas LLC owners that govern operations.
Free Templates Since a Texas LLC generally will not own any real property upon formation, then there is no need to go out and hire an attorney to draft a custom Texas LLC Operating Agreement. Many Texas LLCs are started between families or friends that do not have counsel and therefore rely upon "free" Texas LLC Operating Agreement templates online. That said, we have found many of those "free" formats to not be very well done. In fact , many of them do not gather the information necessary to actually create the contract (such as the necessary answers to the question posed for many provisions of a Texas LLC Operating Agreements). If an LLC expects to lease real property or establish a banking account, then it will likely need to have a written Texas LLC Operating Agreement.
Paid Templates & Consultation Providing a paid example template to Texas LLC owners can be beneficial for the Texas LLC owners starting out. At TexasLLC.org, we’ve created a paid solution for business owners that need a Texas LLC Operating Agreement (and a few other company formation documents). An example template is also available through our company formation services and continues to be available if ever needed in the future.
Texas LLC Operating Agreement Mistakes
Just as an error in a home construction project could have lasting effects and huge financial implications, a mistake in an LLC Operating Agreement can hurt for a long time – and can end up being costly. Here are some pitfalls and mistakes to watch out for:
General
Every member must be a Party to the Operating Agreement. A problem with a Texas LLC Operating Agreement is if you "forget" to get all the members to sign it. By the Texas LLC Act, each member is required to sign it. No signature means that the person is not a member. If they are not a member, then the entire Agreement must be amended and the previous one can be used as evidence of some other agreement. Not to worry if you forgot just have the missing party(s) sign, but be on your toes. Some types of LLCs (in particular LP/LLC, and Manager-managed LLCs) require an elections with the IRS. The IRS wants all owners to sign an election. If one or more owners or members did not sign, you might be subject to penalties. This assumption is generally a bad idea. When in doubt get signatures!
Not Have Required Language
Under the Texas LLC Act, if you do not have language saying that the Act shall control, it will be deemed as controlling. As always, consult an experienced attorney before creating or modifying any legal documents.
Amending your Texas LLC Operating Agreement
As business partners come and go, it is essential for limited liability companies to periodically update their operating agreements. Perhaps the best time to do this is when a new member joins the LLC. At this time, the governing statutes have certain inferences as to the rights and duties of that new member, and therefore a great opportunity to spell out any specific obligations and rights that they may be entitled to or subject to by the existing members of the company. More often than not, when drafting an operating agreement, it is easiest to spell out everything in detail, so that nothing is left open for interpretation. To do this properly , it is essential to be more specific than the statutes themselves when creating the operating agreement. However, when a new member joins the company, it is best to revisit the document, and make any changes necessary to accurately reflect the current state of affairs and the agreement between all the members. In addition to making updates whenever a new member is added, is it also significant to make revisions if a member is removed or dies. In Texas, an LLC is forced to dissolve if the managing or controlling member leaves the company. This is something that is easily avoided by having provisions in your operating agreement which allow for the business to stay afloat even if certain members are no longer with the company.