Why should a Texas LLC have an operating agreement?
A Texas LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.
According to Texas Business Organizations Code § 101.052, Texas LLCs are not legally obligated to have an operating agreement (or “company agreement”). However, you will need an operating agreement to maintain your LLC. Here’s why:
1. You’ll need an operating agreement to open a business bank account.
After you file your Texas Certificate of Formation, you’ll want to open a bank account for your business. Why? Your LLC only has limited liability if it can prove it’s a separate entity from its owners. Mixing personal and business spending erodes this separation, so it’s crucial to open a business bank account and keep your business finances separate. When you head to the bank, you’ll need to bring a copy of your operating agreement.
2. An operating agreement can help reinforce your limited liability status.
To benefit from limited liability status, business owners must be able to show that their company is its own legal entity separate from its owners. One way to do this is to open a business bank account and keep spending separate. Another way is to create (and follow) an LLC operating agreement.
3. An operating agreement can help prevent misunderstandings.
It’s probably impossible to completely eliminate disagreements and misunderstandings within company. (We’re all only human, after all.) But having an operating agreement that establishes rules and procedures for your company can help prevent those minor snags from undoing your LLC.
4. An operating agreement can override Texas’s default laws.
If you don’t have an operating agreement, your LLC will automatically be governed by Texas’s Limited Liability Company Code. The problem is, Texas’s state statutes might not fit with your business. Creating an operating agreement will allow you to run your company in the way you see fit.
Texas Case Law
We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*
“Consider the case of Penny v El Patio, LLC, where the LLC’s manager believed that some individual members received misappropriated funds to the detriment of other members of the LLC. Consequently, the manager initiated litigation attempting to recover those misappropriated funds. The offending individuals tried to collaterally attack the manager’s efforts by asserting to the courts that the attorney hired by the manager lacked authority to bring and continue litigation against the offending individuals on behalf of the LLC. Fortunately for the other LLC members, the members had previously adopted and maintained an operating agreement, and the courts gave weight to the operating agreement’s provision authorizing the LLC manager with full control and powers necessary to conduct the business. The courts interpreted this broad grant of authority as including the authority to file suit against persons and entities believed to have misappropriated funds.
“Had the members failed to adopt and maintain an operating agreement, untold amounts of resources would have been expended litigating and resolving this dispute. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”
What is included in a Texas operating agreement?
Technically, your Texas operating agreement can include anything (within the law) not already covered by Texas’s state statutes. However, a strong operating agreement is essential, and should include:
- Transfer of membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Management
- Compensation
- Bookkeeping procedures
- Dissolution
