Forming a Texas LLC takes a lot of planning. Between the Certificate of Formation, business licenses, franchise taxes, and more, there’s a lot to consider. And paperwork and startup costs aren’t the only necessary tasks. You’ll also want to set up your LLC to run smoothly and avoid legal troubles after it’s been registered with the state.
That’s where the LLC operating agreement comes in.
Time-Saving Hack: There are a handful of online LLC websites that can form an LLC for you and include a free customizable operating agreement. ZenBusiness, though, is the only one that offers a free operating agreement in every package.
What is an LLC Operating Agreement?
An operating agreement – also called a “company agreement” in Texas – gives your business structure and official procedures. It designates ownership, establishes operations, defines member responsibilities, and provides legal protection. Essentially, it lays out everything someone might need to know about your LLC. And it’s an internal document, so there’s no filing or fees involved.
Whether you’re starting a multi-member or single-member LLC, we strongly recommend completing an operating agreement. It’ll benefit and protect you for as long as you’re in business.
Am I Required to Have an Operating Agreement in Texas?
No, you don’t need an operating agreement on file to do business in Texas. However, adopting one provides your LLC with a number of essential benefits. It allows you to set up specific processes for how the business runs, and it protects your personal assets in potential disputes.
Think of the agreement as your company bylaws or ground rules. It lays out your business structure and legitimizes it in front of courts, banks, other companies, and anyone else who might want to see it. So, think long and hard before commencing business in Texas without one.
Benefits of Creating an Operating Agreement
You want what’s best for your business. Months or years in the future, you want it to be a profitable and thriving endeavor. Having an operating agreement in place will set up your LLC for sustained success.
It requires some legwork, but it’s well worth it. Just look at some of the benefits:
- Officially designates how the ownership is split up (the percentage each member/manager owns), so there are no disputes.
- Standardizes office and company operations to improve efficiency
- Outlines the procedures for member additions and resignations, registered agent changes, dissolutions, and more, so there is no confusion.
- Avoids Texas’ “default rules,” which define baseline procedures for any LLC without an operating agreement and aren’t necessarily the best for your business.
- Grants you greater respect from Texas courts.
Free Texas LLC Operating Agreement
So, you’ve decided to create an operating agreement, and your first step is to search out some online resources. Good move. It’s an important legal document, so you’ll want to make sure you don’t forget anything. Unfortunately, if you’re looking to the Secretary of State website for guidance, you won’t find any official forms or instructions.
So, you’ll need to create your own, but don’t be intimidated! You don’t need to be an attorney or expert writer to draft an effective agreement. Plus, you can find plenty of free templates online to help you with the structure and legal terminology. While most of these templates are good options, a great starting point is one that you can get free through an affordable LLC service like ZenBusiness or Northwest Registered Agent.
Whether you’re using a template or starting from scratch, here’s a quick and easy guide for what to include:
Owner or Member Information: Names and mailing addresses.
Company Information: Your LLC’s name, registered office, and principal office.
Registered Agent Information: The name of your registered agent, their address, and contact information.
LLC Formation: The date you filed or will file your Certificate of Formation with the Secretary of State.
Business Purpose: The type(s) of business your LLC will be doing in Texas.
Term: How long your LLC in Texas will be valid, typically until you file for termination.
Capital Contributions: The amount of money each member has invested in the LLC.
Profits, Losses, and Distributions: How income and debts are allocated among members and methods for distributing funds.
Ownership Percentage: How much of the company each member owns.
Management and Roles: The managerial structure and decision-making processes, naming who is in charge or certain operations.
Compensation: How members/managers are compensated and reimbursed.
Bookkeeping: Accounting procedures and member account policies.
Tax Treatment: Whether your LLC will be taxed as a Sole Proprietorship, Partnership, S-Corporation, or C-Corporation.
Member Additions: The procedure for bringing on new members – how they will be admitted, if they’re entitled to income, any expenses they will owe, their roles, etc.
Member Withdrawal: Procedures for the resignation, expulsion, retirement, or death of an existing member.
Amendment Procedures: How your LLC will approve changes to the operating agreement. Usually, it’s through a majority vote by the members.
Dissolution: What happens when you terminate your LLC. How your members will split up the remaining assets or debts.
You don’t always need to include all of the above. If any don’t apply to your LLC, feel free to leave them out. Still, it’s a good idea to cover as many bases as possible. Even if you’re a single-member LLC, you should consider including as many sections as possible to accommodate future changes. Otherwise, years into the life of your business, you may run into a dispute over something you didn’t include, and you won’t be able to fall back on the operating agreement.
When you’re finished, take a well-deserved break before passing along the operating agreement to each of your LLC’s members. It only takes effect after every member approves it. But don’t worry about sending a copy to the Secretary of State. It’s an internal document, so just file it with your other business documents for safe keeping.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in Texas and, hopefully, raking in profits, the LLC will grow and evolve. It will develop different needs and more complicated processes. Keep everything running smoothly but updating your operating agreement as changes occur.
First, all LLC managers/members must approve the change. To seek approval, follow the guidelines you already outlined in your operating agreement for ratifying amendments.
Because it isn’t recorded with the state, modifying your agreement is as simple as making changes to the Word document or PDF you keep in your own files.
For example: your registered agent resigns and, following Texas law, you appoint a registered agent service to take their place. Simply pull up your electronic file, enter the new agent information, save it, and print a copy. Make sure you keep a draft of the previous document as well so you can track the changes you’ve made, just in case the state ever has any questions.
Hiring an Attorney
Worried that you might miss a critical detail? Uncomfortable with legal minutiae? If you want to ensure your operating agreement provides for all possible outcomes and disputes, you might consider hiring an attorney to review it or write it entirely.
Some attorneys have a flat rate for drafting an operating agreement; others bill by the hour. Either way, you’ll only need their assistance for a limited period of time. Use a site like Avvo to find the right fit for your business. Avvo’s database lets you sort by location, rate, and more – it even shows Texas lawyers that specialize in LLCs.
Hiring an LLC Formation Service
The LLC formation process, with its forms and fees, might make you want to throw up your hands and surrender. Don’t do that! Instead, consider hiring an online service like ZenBusiness or Northwest Registered Agent.
An online service like we mentioned earlier can quickly take care of all your necessary filings. Plus, they’ll create a customized operating agreement for you!
Given the amount of time you would spend drafting an agreement from scratch, a formation service is worth it. Not only will you receive a meticulously researched and crafted operating agreement, but you’ll also be able to spend more time growing your business, planning your next move, or just relaxing.
Like most other aspects of the LLC formation process, you will need to follow the state’s guidelines for creating an operating agreement. The good news is that they aren’t too restrictive.
According to Section 101.052 of the Texas Statutes, an operating agreement governs “the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and other internal affairs of the company.” So, your agreement dictates most actions and conduct within your company. It’s a broad concept, but make sure you include a lot of details because anything that’s not covered will be governed by the state’s default laws instead.
There are also limitations on an operating agreement’s authority. Section 101.052 also states that the agreement “may contain any provisions for the regulation and management of the affairs of the limited liability company not inconsistent with law or the Certificate of Formation.” When creating your agreement, be careful not to make one of two big mistakes:
- Including actions or procedures that break state or federal law, or are inconsistent with your Certificate of Formation
- Including exemptions from the state’s LLC maintenance requirements. For example, you need to maintain a valid registered agent and submit annual franchise tax reports no matter what your agreement says.
Creating an operating agreement is a big undertaking, but as long as you follow this guide and don’t overstep the state’s boundaries, your LLC will be prepared for long-term success and stability.