Texas offers a welcoming climate for entrepreneurs. If you’ve decided to start a business here, you’ve made a smart choice. The Lone Star State is renowned for its low business tax and nonexistent personal income tax. Government initiatives like the Texas Enterprise Fund (TEF) provide financial incentives to companies that promise job creation and capital investment. Texas’s $1.9 trillion economy is also the second biggest in the country, second only to California.
As an entrepreneur, you’re poised to get a piece of that pie. However, before you start operating your limited liability company (LLC), it’s imperative that you create a Texas Operating Agreement. This essential piece of paperwork carefully lays out who runs your business and how. It provides operational clarity, prevents disputes, and serves as a general guiding light for your startup.
Before you set up shop in Texas, create an airtight Operating Agreement to protect your business interests — and you, as the business owner. This guide provides step-by-step details on what your Operating Agreement should include. It also addresses points specific to Texas, such as the possibility to establish a Series LLC, and explains how this may impact your Operating Agreement requirements.
What is a Texas LLC Operating Agreement?
An Operating Agreement is a building block of success for any Texas LLC. This paperwork should detail who owns the business, how much of the business they own, and their rights and responsibilities. The Operating Agreement should also specify who runs the business from day to day. Finally, this document will contain provisions for possible future business developments, such as the dissolution of the business.
It might seem strange to lay out the guidelines for such possibilities now. After all, you’re just starting your business — ending it is the last thing on your mind. It’s best to get these details down on paper before you reach this endpoint. Later, the stakes will be higher. You and your business partners will be more invested emotionally and financially. Having a legally binding document that sets out how to approach a touchy topic like dissolution can prevent difficult discussions and possible disputes.
So, let’s get to it. When you establish your Texas LLC, you have to file a Certificate of Formation with the Secretary of State and pay a 0 filing fee. If you pay by credit card, you will also be charged a 2.7% convenience fee. This can be submitted via the state’s SOSDirect website, or you can print out Form 205 and send it by mail to the corporations section of the Secretary of State (the postal address is on the form).
When you submit the Certificate of Formation, you provide essential details about your LLC that will also be relevant to your Operating Agreement. These include:
- Management structure: You must specify how the LLC will be governed. LLCs may be managed by their members (these are referred to as member-managed LLCs) or by one or more managers with or without any stake in ownership (manager-managed LLCs).
- Business purpose: A generic statement of purpose must be given, affirming that the business is formed to conduct lawful business in the state of Texas. This is sufficient in most cases, but special LLCs, like Series LLCs, will have to provide more detail.
- Organizer: This is whoever is filing the Certificate of Formation paperwork for the LLC. It could be a member, or it could be an attorney or another business representative.
- Registered Agent: This is the person or company designated to accept legal mail on the LLC’s behalf. A person must be physically present at this address. You can’t use a P.O. Box. ZenBusiness also offers a registered agent service.
- Effectiveness of filing: This can be a specific date or a specified event. For example, you could decree that the Certificate of Formation comes into effect once all members sign the Operating Agreement.
Texas does not require you to submit an Operating Agreement when you file the Certificate of Formation. In fact, the state doesn’t obligate you to create this document at all. That said, it’s best practice to have it finalized before you commence business operations. The Operating Agreement clarifies the daily running of the business. It also provides additional legal protection for LLC members, further separating their personal assets from the business’s.
An Operating Agreement becomes even more imperative if you are establishing a Series LLC. Under this business model, multiple individual LLCs operate under the umbrella of one master LLC. Each LLC has its own assets and liabilities and conducts business independently. An Operating Agreement should contain a statement specifying the limitation of liability with respect to the series. The Certificate of Formation must also contain a notice of limitation of liability. See the Texas statutes related to Series LLCs for more information (note that the statutes refer to an Operating Agreement as a “company agreement”). The Texas Secretary of State website also has information on Series LLCs.
Why do I need an LLC Operating Agreement in Texas?
Although a standard LLC Operating Agreement is an internal document and doesn’t need to be submitted to the state, it’s a must-have piece of paperwork. The United States Small Business Administration (SBA) warns against conducting any business until an Operating Agreement is put into place. According to the SBA, “It is unwise to operate without an Operating Agreement even though most states do not require a written document.”
What makes the Operating Agreement so valuable is that it’s considered a legally binding contract — once all the members of your LLC have signed it. You don’t even need to get it notarized. Although Texas law does not demand an Operating Agreement, it does recognize the document’s validity. Section 101.054 of the state statutes reads:
“Except as provided by Section 101.054, the company agreement of a limited liability company 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.”
What does all that mean? Basically, what it boils down to is that the Operating Agreement — referred to as a “company agreement” in the Texas legal code — is valid and recognized by the state. If you end up in a legal dispute, the courts will uphold the Operating Agreement (assuming it doesn’t breach any state or federal laws). Since a comprehensive Operating Agreement is very detailed, you get to control many aspects of how your business is run.
Here are some of the benefits of a Texas Operating Agreement:
- Harness the flexibility of the LLC business model: One reason the LLC business model is so popular is thanks to the flexibility it provides. LLC owners are exempt from many of the more complex tax and reporting requirements of a corporate business structure, for example. By creating a detailed Operating Agreement, LLC owners can maximize the flexibility of the LLC structure. This paperwork allows you to stipulate details about everything from profit-sharing to succession planning, allowing you to mold your business in a way that best suits your personal needs and preferences.
- Bring credibility to your business: An Operating Agreement makes your business more legitimate in the eyes of others. It brings transparency to your business, proving to third parties that you are operating in an organized manner in line with state and federal regulations. Say that you are courting investors for your LLC, for example. They will ask to see an Operating Agreement before giving you any money. Other organizations or individuals who might request an LLC Operating Agreement include banks, lending companies, title companies, accountants, tax professionals, attorneys, and the courts.
- Formalize spoken agreements in writing: When you start a business — especially with friends — a lot of initial agreements are made verbally. There’s nothing wrong with sketching your brilliant business plan out on a cocktail napkin with your friend and future business partner. That said, it’s imperative that you put any spoken agreements into writing via your Operating Agreement. If you and the other party have different memories of what was agreed on, the Operating Agreement will serve as a point of reference. It will also be easier to uphold in court if your disagreement comes to that.
- Keep the state out of your business: Texas law recognizes Operating Agreements. However, without a written Operating Agreement, the state has no choice but to refer to standard laws. For example, most state laws decree that LLC profits shall be divided depending on ownership percentage. A person who owns 70% of the business gets 70% of the profits, while a 30% owner gets 30%. If you want to divide profits differently, for example, because the 30% owner is also the day-to-day manager and puts in so-called “sweat equity,” you must lay this out in the Operating Agreement.
- Protect yourself from personal liability: According to the SBA, an LLC also protects you from personal liability in most cases. While it’s not something you want to dwell on, it is possible that your LLC might face a lawsuit or bankruptcy. It’s wise to be prepared in case one of these worst-case scenarios arises. If it does, your Operating Agreement will help distinguish your personal assets from your business assets. This means you aren’t at risk of losing private possessions like your house, car, or personal savings.
Finally, as mentioned, if you are in the unique situation of forming a Series LLC, an Operating Agreement is imperative. The state of Texas defines a Series LLC as “an LLC that provides in its governing documents for the establishment of a series of members, managers, membership interests, or assets that have separate rights, obligations and liabilities and business purposes from the general LLC.”
Those governing documents being referred to? That includes the Operating Agreement! Again, in a series model, every individual LLC can sue or be sued, enter into contractual agreements, or hold assets, without the other LLCs being affected. The Operating Agreement helps to affirm this separation of liability, offering added liability protection.
What do I include in my Texas LLC Operating Agreement?
Every business is unique — so it should come as no surprise that every Operating Agreement should be unique too. Essential details of business governance, like management structure and the distribution of profits, are determined on a case-by-case basis. There is no set rule for how to handle such points. It depends on your business needs. While the details may differ, every Operating Agreement should at least include a few basic points. This section lays out some of the most important details that can be included in an Operating Agreement.
Here are some things you may want to include in your Texas Operating Agreement:
- LLC Name
- Management Structure
- Duties of Members and Managers
- Voting Rights and Responsibilities
- Tax Structure
- Holding Meetings
- Buyout and Buy-Sell Rules
- Succession Planning
- Modifications to the Operating Agreement
- Single-Member LLC Statute
- Severability Provision
1. LLC Name
Specify your business name as it appears on your Texas Certificate of Formation. This is important because the name on these documents is how your business is legally recognized by the state. To avoid confusion, Texas requires that an LLC name must be distinguishable from any other business name on record, including those businesses that are no longer operating.
Texas also has very strict requirements for naming LLCs. You can’t use certain words like “university” or “bank,” for example, because they mislead people about your business purpose. Additionally, Texas requires that an LLC name include the term “limited liability company,” “limited company,” or an accepted abbreviation. “LLC, “L.L.C.,” and “L.C.” are all possibilities and can make a business name less clunky.
The owners of an LLC are commonly referred to as members. Ownership or “membership” details are a basic piece of information every Operating Agreement should cover. The legal names of all members and their basic contact information should be listed. The Operating Agreement should also specify how much of the business each member owns.
So-called “degrees of ownership” show what percentage of the business each member owns. This is important information because it’s often aligned with member duties and privileges, like voting share and profit share. Many businesses base the degrees of ownership on initial capital investment, meaning that people who put more money into the business upfront own more of it.
3. Management Structure
When you submit the Certificate of Formation to the Texas Secretary of State, you must specify your LLC’s governance structure. The state requires business owners to clarify whether the LLC will be governed by the members or managers. Managers can be members (and members can be managers), but members don’t have to be managers.
Say you plan to run the business from day to day, but the other member involved doesn’t plan to be involved in daily operations — they are putting up capital as a silent investor. In this case, you might agree on a manager-managed model. You will be designated as the manager and responsible for running the business daily.
4. Duties of Members and Managers
Every person involved in the LLC should have their duties and obligations outlined in the Operating Agreement. Say you are a member and manager, running the daily operations, while the other member is a silent investor — meaning they put in capital to start the business but aren’t involved in the day-to-day operations.
The Operating Agreement should determine what operational decisions you can make on your own without consulting the other member. Can you switch suppliers, for example? The Operating Agreement should also describe the other member’s job. Just because they don’t handle operations doesn’t mean they don’t have responsibilities. They might be obligated to attend quarterly business meetings, for example.
5. Voting Rights and Responsibilities
One of the most common and important rights (and responsibilities!) of members is the right to vote. The Operating Agreement should describe what points need to be voted on in the business. Possibilities include bringing in a new member, changing profit distribution, revising the Operating Agreement, or even dissolving the business.
The Operating Agreement should also specify who votes on these points and how much of a say they have. Many businesses divide voting shares according to shares of ownership. So, if you own 60% of the business, and another member owns 40%, you would get six votes to the other member’s four.
Distributions refer to how profits are divided and distributed among members. You should create a separate business bank account for the LLC. All money made by the business entity goes here. Through a process known as capital distribution, money can be removed from the LLC bank account and distributed to members.
The Operating Agreement should specify when this is possible and how. For example, an LLC member could write a check from the LLC bank account to the individual member’s account. It should also note the division of distributions. In most cases, this reflects each member’s ownership share. So, if each member owns 50% of the business, the profits are split evenly.
7. Tax Structure
In most cases, LLCs opt to be taxed as “pass-through” structures. This means that the business entity itself is not taxed. Instead, members pay individual taxes on whatever profits they earn from the business.
This isn’t your only taxation option as an LLC, however. You can elect to have your LLC taxed as a corporation or partnership, as the IRS explains. Consult an attorney to determine which tax model is best for you. Whatever you decide on, make sure the Operating Agreement specifies the chosen structure.
8. Holding Meetings
Your LLC isn’t required to hold meetings by Texas law, but it’s smart to meet regularly. Meetings bring together members and managers to discuss business updates, like potential new members or revisions to the Operating Agreement. It’s best to make regular meetings mandatory via the Operating Agreement.
You may also want to set procedures for holding meetings. Who can call them, where should they be held, and is virtual attendance allowed? Will someone take minutes, and, if so, where can these be accessed? Who sets the agenda for the meeting? Clarifying these details upfront helps create more successful meetings.
9. Buyout and Buy-Sell Rules
At some point, an LLC member may want to transfer their interests in the business — meaning shift them to someone else. The Operating Agreement should include buyout and buy-sell provisions.
For example, it can be less disruptive to the business if the member transfers their interests to an existing member. This is why most Operating Agreements include a “right of first refusal.” This stipulates that if a member wants to sell their interests, they have to first offer them to other members on the same terms as they would to a third-party buyer.
10. Succession Planning
When an LLC member passes away or retires, what happens to their interests in the business? Operating Agreements should include details of succession planning to define the possibilities. For example, some businesses may allow interests to be passed to a person’s family members. They may include a clause, such as these individuals not having voting rights.
Succession planning needs to be clarified for all members so that they can update their estate planning documentation accordingly. Legal mechanisms like wills and trusts determine what happens to a person’s assets when they pass. Members need to know how to treat their ownership of the business in this documentation.
If members decide to permanently end an LLC’s business operations, this is a decision that likely needs to be reached unanimously. The Operating Agreement should specify this fact. It should also lay out the process for dissolving the business. Certain steps need to be taken to wind down operations in line with the law, such as a final tax filing.
To dissolve a Texas LLC, you must submit a Certificate of Termination to the Secretary of State and pay a $40 filing fee. However, before you can do this, you must prove that you’ve met your business tax obligations by applying for a Certificate of Account Status from the Texas Comptroller’s office.
12. Modifications to the Operating Agreement
The Operating Agreement can be changed and adapted to suit your business needs. All of the members should review the document at least once per year to see if any amendments are needed. The document also needs to be updated as soon as financial or functional changes are made to business governance.
The Operating Agreement should include details on how it can be changed. Who needs to vote to change which points? Does the vote need to be unanimous or a simple majority? Who needs to sign off on the final changes? Answer all of these questions now to avoid confusion down the line.
13. Single-Member LLC Statute
If you are the only owner of your LLC, you are a single-member LLC. In this case, it might seem like some of the provisions described above don’t apply to you. After all, there’s no need to worry about the division of profits when there’s only one person involved.
Even as a single-member LLC, an Operating Agreement is important. It clarifies how your business is run and helps protect you from personal liability in case the company runs into legal trouble. You should also include a single-member LLC statute to affirm that you are the only LLC owner and the only person who may make decisions about the business operations.
14. Severability Provision
A severability provision is standard for pretty much every legal contract. It’s just a short phrase that asserts that if one part of a legal contract is found to be invalid or erroneous, it doesn’t impact the validity of the remaining parts. You should include this point to ensure that one small mistake or oversight doesn’t destroy your entire Operating Agreement.
Partner With ZenBusiness for Professional Assistance
ZenBusiness has a customizable Operating Agreement template that can help you as you create your Operating Agreement. The above list provides a very basic overview of some of the essential points you should include. This isn’t an exhaustive list, however.
You will need to add additional material depending on the type of business and other unique needs in terms of membership and governance. Consult a legal professional with knowledge of Texas business and tax law to finalize your Operating Agreement and ensure it covers all your bases.
Updating and Revising Your Texas LLC Operating Agreement
One of the best things about Operating Agreements is their flexibility. This isn’t a document that you draft once, file away, and never look at again. You can update it whenever and however you want, ensuring it always reflects your business’s most up-to-date needs. It’s up to you how often you want to review your Texas LLC Operating Agreement. All members should sit down together at least once per year to read through it — once per quarter is even better.
As you go through the paperwork, keep a record of any points that need changing. This is also an opportunity to propose changes to the other members. For example, say your LLC is currently member-managed, but you are interested in converting to a manager-managed model. Your annual LLC review is an opportunity to present this argument to members and vote and get their signoff if they agree.
Additionally, there are other instances when you should revise your LLC right away to reflect immediate updates. These could include:
- The addition of new members or the removal of former members
- Revisions to members’ voting rights
- Changes to profit-sharing details
- Updates to the governing structure
- Amendments to the LLC name
Basically, whenever anything that’s mentioned in the original Operating Agreement is changed in any way, the document needs to be updated to reflect this. This applies even for details that might seem “small” or “insignificant.” A rundown of the above list will give you some idea of elements that might require revision.
Take an update to the LLC name, for example. The Operating Agreement refers to the official business name as it appears in state records, where it is legally recognized as a business entity. If you change the business name, you need to reflect this in the Operating Agreement — otherwise, the document could be seen as not actually referring to your business and become essentially nonapplicable.
So, what does it take to actually update your Texas LLC Operating Agreement? Here’s a quick step-by-step primer:
- Call a meeting of members. Everyone will have to sign off on any Operating Agreement amendments. It’s not a task that one member or manager can do on their own, so you might as well call everyone together from the start.
- Refer to the original Operating Agreement to determine what steps need to be taken to amend it. For instance, the document should specify who is allowed and obligated to vote on the Operating Agreement and what percentage majority is needed for a passing vote.
- Go through the Operating Agreement point by point. You may want to have members review the document privately first. You can then go through point by point together, allowing an opportunity for members to flag points they would like to see amended as you go through.
- Vote on any proposed changes in accordance with the guidelines laid out for voting in the Operating Agreement. Once changes are agreed on, incorporate them into the Operating Agreement (in writing).
- Have all members review the new Operating Agreement to ensure the changes have been properly implemented. All members need to then sign off on the revised Operating Agreement for it to become legally enforceable.
While you don’t have to file your Operating Agreement with Texas or alert the state when you amend the Operating Agreement, keep in mind that the Operating Agreement does contain information that is also filed with the state. If any of those points are amended in the Operating Agreement, they must be amended in the state’s records, as well.
This would basically refer to any details included in your Certificate of Formation. For example, if you change your LLC’s name, you must file a Certificate of Amendment and pay a $150 filing fee. If you change the actual business entity’s address, you have to update this information with the Texas Comptroller.
Texas Operating Agreement FAQs
- Is an LLC Operating Agreement required in Texas?
You are not legally required to formulate an Operating Agreement in Texas. However, Texas state statutes do recognize the validity of LLC Operating Agreements. Once every LLC member has signed the document, it is considered a legally binding document. It’s thus in your interest to create a comprehensive LLC Operating Agreement because it gives you power over many essential details of your business. Otherwise, state law may govern points like profit distribution and succession planning.
The need for an Operating Agreement becomes even greater if you are forming a Series LLC. In this business model, multiple individual LLCs are run under a single master LLC. Each individual LLC has its own assets and liabilities. An Operating Agreement helps to affirm this delineation of business operation and liability. Your Operating Agreement should include a notice affirming the limitation of liability with respect to the series.
- Where do I get an LLC Operating Agreement in Texas?
Texas does not provide any specific paperwork to fill out when creating an Operating Agreement. ZenBusiness has a convenient template that you can use as a point of reference as you write your Operating Agreement. This can help you cover basic points that should be included in every Texas LLC Operating Agreement.
It’s advisable to have a lawyer review your Operating Agreement before finalizing it, however. They can catch items you may have missed and add more complex provisions, for example, regarding lawsuits against members.
Once you have your Operating Agreement, make sure to store it securely. Again, this is a legally binding contract and a valuable point of reference that you and other members will have to refer to regularly. Keep one copy at your principal place of business alongside other essential documentation like a copy of your Certificate of Formation. If you retain a business attorney’s services, have them keep a copy on file, as well.
- Does a single-member LLC need an Operating Agreement in Texas?
Yes. Of course, some of the points included in an Operating Agreement, such as voting among members, become less relevant in a single-member LLC. However, you must still address such issues in an Operating Agreement, specifically through the inclusion of a single-member LLC statute. This is a provision that confirms that you and only you are the sole member of the LLC, and the only person allowed to make business decisions governing the LLC.
An Operating Agreement is also essential for single-member LLCs because of the added liability protection it provides. This document states that you, the LLC’s owner and sole member, are distinct from the LLC. If the business entity faces issues like litigation or bankruptcy, this differentiation helps to safeguard you and your personal assets. Your private possessions, like cars or homes, will be better protected.
- Do I file an LLC Operating Agreement with Texas?
Texas does not require you to file an Operating Agreement with the state. You should still create this document and have it readily available at your principal place of business, however. Creating an Operating Agreement will benefit you in many ways, for example, by formalizing verbal agreements between members and offering added liability protection. Failing to create an Operating Agreement can backfire, for example, by allowing state law instead of the Operating Agreement to dictate your business’s governance.
Series LLCs have an even greater need for Operating Agreements. In this case, the Operating Agreement helps to delineate the liability of individual LLCs under the master LLC. Consult a legal professional to draft an Operating Agreement that includes a notice of limitation of liability with respect to the series. You should also include a notice of limitation of liability in the Certificate of Formation when establishing your Series LLC.
- Can I write my own LLC Operating Agreement in Texas?
Yes, this is technically permitted. An Operating Agreement template from ZenBusiness can give you a framework to guide the process. A legal professional should review the document before it’s finalized, however. They will be able to add details relevant to your specific business model and needs and can incorporate more complex legal clauses.
What happens if one of the members is sued because of activities they undertook related to the business, for example? A legal professional can help protect other members and the business.
This is especially important if you are creating a Series LLC, which is a more convoluted business structure. Only a minority of states permit Series LLCs. Texas is one of the few. You thus want a legal professional who is not only familiar with Texas business law but also Series LLC legislation. They can ensure the Operating Agreement is properly worded to avoid any potential legal troubles down the line.
- Do I need a lawyer for an LLC Operating Agreement in Texas?
No, you aren’t technically obligated to have a lawyer review your Texas LLC Operating Agreement. Enlisting the help of a lawyer can save you time and stress, however. They will have expert insights into Texas rules and regulations and can ensure you haven’t missed any important details.
Finally, if you are establishing a more complicated Series LLC, always seek legal counsel. When it comes to a Series LLC, the state specifically recommends seeking the assistance of an attorney and a tax adviser. There is no specific form to create a Series LLC, and there is also no Operating Agreement paperwork you can easily fill out for a Series LLC. You will have to draft the documentation yourself. This is a job best left to a business attorney who is familiar with the technical legal language and Texas state laws governing Series LLCs.