Operating agreements

Business Formation

Without it, the statute writes your agreement for you.

A Texas LLC does not have to file a company agreement, and many owners never adopt one beyond whatever the formation service generated. The Business Organizations Code then supplies default rules on management, voting, distributions and withdrawal. Those defaults are not tailored to your business, and they rarely reflect what the members believe they agreed.

What a company agreement should decide

• Management. Member-managed or manager-managed, who can sign contracts, and what spending limits apply without approval.
• Voting. What requires unanimity, what requires a majority, and how majority is measured — by percentage interest or by head.
• Capital. Initial contributions, whether members can be required to contribute more, and what happens to a member who will not.
• Distributions. When profits are distributed, and tax distributions so that members are not taxed on income they never received.
• Transfers. Restrictions on selling an interest, rights of first refusal, and what happens on death, divorce or bankruptcy of a member.
• Buy-out. Triggers, valuation method and payment terms — the most valuable pages in the document.
• Deadlock and dissolution. How a stalemate is broken, and how the company winds up if it must.
• Fiduciary duties, which Texas permits to be modified within limits, and indemnification of managers.

What goes wrong without one

• Members claiming unequal shares, with nothing in writing to contradict them.
• No way to remove a member who has stopped performing.
• Unexpected tax consequences, including members taxed on income they never received.
• Weakened liability protection, because the company cannot show it was run as a company.
• Difficulty opening bank accounts, borrowing or closing a sale — institutions ask for the agreement, and "we never made one" is an unhelpful answer.
• Disagreements that end in litigation because there is no agreed way to break a tie.

Succession, tax and the parts people forget

A good company agreement also decides what happens on a member's death — whether the interest passes to their heirs, or is bought out — and how the company is wound up if it comes to that, including how assets and liabilities are distributed. It sets out tax responsibilities and tax distributions, and where the business operates in more than one state, it should account for registration and compliance in each of them.

Single-member LLCs still need one

It documents the separation between owner and company, which is exactly what a creditor will attack; it establishes succession if the owner dies or is incapacitated, so the business does not freeze; and banks, investors and buyers ask for it. It is short and it is worth having.

When members fall out

Company agreement disputes are among the most common business cases we handle: a manager acting beyond authority, distributions withheld, books and records refused, a member excluded from decisions, or an oral side agreement that contradicts the written one. Texas gives members inspection rights and remedies for breach of fiduciary duty, and the outcome usually turns on what the document says — which is the argument for writing it properly.

Common questions