Forming a limited liability company in Texas offers business owners flexibility, liability protection, and favorable tax treatment. But formation alone is not enough to protect the business or its owners. One of the most important documents for any LLC, even though it is not required by Texas law, is the operating agreement. This document governs how the company is run, how decisions are made, and how conflicts are handled.
Whether you are forming a single member LLC or a multi member LLC, understanding how an operating agreement works and what it should include is essential. A well drafted operating agreement reduces uncertainty, limits disputes, and provides clarity when issues arise.
This guide explains what an LLC operating agreement is, why it matters in Texas, and how to approach drafting one that fits your business.
What Is an LLC Operating Agreement?
An LLC operating agreement is a private contract among the members of the company. It sets out the ownership structure, management framework, financial arrangements, and operational rules of the LLC. In practical terms, it acts as the internal rulebook for how the business functions.
The operating agreement defines who owns what, who has authority to make decisions, how profits and losses are allocated, and what happens if a member wants to leave or the business needs to wind down. When disputes arise, courts often look to the operating agreement first to determine the rights and obligations of the members.
Does Texas Require an Operating Agreement for an LLC?
Texas does not require that an LLC have a written operating agreement. However, operating without one means that the Texas Business Organizations Code will supply default rules to govern the company. Those default rules are generic and may not reflect how the members actually intend to run the business.
Relying on default rules can create problems, especially in multi member LLCs. An operating agreement allows the members to customize rules around management, voting, distributions, and exits rather than leaving those issues to state statutes that were not written with your specific business in mind.
Benefits of Having an Operating Agreement
An operating agreement provides practical and legal benefits that extend beyond basic compliance.
- It clarifies roles and responsibilities by defining who manages the company and what authority each member has. This reduces misunderstandings and prevents informal decision making from turning into disputes.
- It helps prevent conflicts by establishing procedures for resolving disagreements, handling deadlocks, and addressing changes in ownership.
- It allows members to override default state rules with terms that better align with the business model and long term goals of the company.
- It strengthens liability protection by demonstrating that the LLC operates as a separate legal entity, which can be important if creditors or opposing parties attempt to pierce the corporate veil.
Key Components of a Texas LLC Operating Agreement
While Texas law does not mandate specific provisions, an effective operating agreement typically includes several core sections.
- Basic Information: This section identifies the LLC by name, principal office address, and date of formation. It also specifies whether the LLC is member managed or manager managed, which determines who has authority to operate the business on a day to day basis.
- Ownership Structure: This section should clearly define each member’s ownership interest, usually based on capital contributions. In a single member LLC, this confirms sole ownership. In a multi member LLC, it allocates ownership percentages and avoids later disputes over equity.
- Management and Voting Rights: This section outlines how decisions are made and who gets to make them. It should address which decisions require member approval and whether approval requires a simple majority, supermajority, or unanimous consent. Clear voting rules are especially important in companies with multiple owners.
- Profit and Loss Allocation: The operating agreement explains how profits and losses are allocated among members. While this often tracks ownership percentages, LLCs have flexibility to structure distributions differently if the members agree.
- Changes in Membership: Provisions addressing admission of new members, withdrawal of existing members, death, disability, or sale of an ownership interest are critical. Without these rules, changes in membership can quickly lead to conflict or litigation.
- Dissolution Procedures: This section sets out when and how the LLC can be dissolved, how assets are distributed, and how outstanding liabilities are handled. Planning for dissolution at the outset helps avoid chaos if the business needs to close or reorganize.
- Miscellaneous Provisions: Operating agreements often include dispute resolution mechanisms, amendment procedures, governing law clauses, and other terms tailored to the business.
Types of LLCs in Texas
Texas law allows for several LLC structures to accommodate different industries and ownership needs.
- A traditional LLC is the most common structure and works well for many small and mid-sized businesses.
- A series LLC allows the creation of separate series under one master LLC, with each series having its own assets and liabilities. This structure is often used in real estate and investment businesses.
- A professional LLC is reserved for licensed professionals such as doctors, lawyers, and architects and is subject to additional regulatory requirements.
An LLC may also elect different tax treatment, including S corporation or C corporation taxation, by filing the appropriate federal forms.
Drafting a Texas LLC Operating Agreement
Creating an operating agreement requires more than filling in a template. The document should reflect how the business actually operates and how the members want it to evolve.
- Tailor It to Your Business: A simple agreement may be sufficient for a single owner LLC, but multi member companies typically require more detailed provisions addressing management, compensation, and exit rights.
- Plan for Common Scenarios: Anticipating disputes, deadlocks, and changes in ownership helps prevent future litigation. Addressing these issues upfront is far easier than resolving them after a conflict arises.
- Work With Legal Counsel: An attorney can ensure the agreement complies with Texas law, aligns with tax planning considerations, and protects the members’ interests.
- Keep the Agreement Current: As the business grows or ownership changes, the operating agreement should be reviewed and updated to remain accurate and effective.
How Do I Form an LLC in Texas?
The process of forming an LLC in Texas generally includes the following steps.
- Choose a Name: The LLC name must be distinguishable and comply with Texas naming requirements. A name search can be conducted through the Texas Secretary of State.
- File a Certificate of Formation: Form 205 is filed with the Texas Secretary of State to legally create the LLC.
- Create an Operating Agreement: Although not required, drafting an operating agreement at this stage establishes the internal rules of the company.
- Obtain an EIN: An Employer Identification Number is obtained from the IRS for tax reporting and banking purposes.
- Register for Taxes and Licenses: Depending on the business, state tax registrations or industry specific licenses may be required.
Why Every Texas LLC Should Have an Operating Agreement
An operating agreement brings structure and predictability to a business. Even for single member LLCs, it demonstrates professionalism, supports liability protection, and simplifies dealings with banks, investors, and potential buyers.
Without an operating agreement, disputes are more likely and resolutions are less predictable. Clear documentation reduces risk and helps the business operate smoothly over time.
How Roquemore Skierski PLLC Can Help
Drafting an operating agreement is a strategic step, not just a formality. At Roquemore Skierski PLLC, we help Texas business owners form LLCs and draft operating agreements that reflect their goals and protect their interests.
Whether you are starting a new company or revisiting an existing structure, our attorneys provide clear guidance and practical solutions tailored to your business. To discuss forming an LLC or creating an operating agreement, contact Roquemore Skierski PLLC at 972-325-6591.
