Texas LLC Operating Agreement: Drafting Checklist

In today’s world, you can streamline your LLC formation with online filings. Still, that doesn’t mean the process is precisely simple. To launch an LLC in Texas, you must draft and file several documents with the Texas Secretary of State.

According to the SoS website, it’s necessary to register or reserve a business name, file a Certificate of Formation, get an Employer Identification Number (EIN), and register with the IRS.[1] These documents are required for legal or income tax purposes and, as such, are mandatory. However, there’s another document that the state may not demand but is nevertheless crucial: the operating agreement.

A Texas operating agreement won’t differ from the same document type in any other state. The agreement will include essential information about your company, such as name and place of business and the name of your registered agent. It will also define the processes in your internal affairs and, as a result, serve as one of the critical governing documents of your LLC.

Your company isn’t required to have an operating agreement in Texas, nor must you file the document with the Secretary of State. Nevertheless, the agreement will serve many purposes regarding organizing your company.

In this article, you’ll learn what an operating agreement is and what needs to be included when drafting the document. We’ll also overview how Swyft Filings can help you organize your crucial business documentation.

Key Takeaways

• Drafting an operating agreement will help structure your Texas LLC, defining the company’s most critical operations, processes, and roles.

• Your operating agreement will denote a crucial aspect of doing business as an LLC: the difference between the company’s and member’s assets and liabilities. With this definition in place, company debt won’t jeopardize your personal assets.

• Due to its importance and potential benefits, you must draft your operating agreement with attention to detail and precise language. Hiring professional help is always advisable when drafting the agreement.

What Is an LLC Operating Agreement?

Your LLC operating agreement will outline the specifics of company operations, structure, membership, and ownership. The document also governs the distribution of profits, voting rights, and management of the company.

This agreement is made between LLC members and, to a large extent, establishes their roles, responsibilities, and relationships. For instance, an operating agreement defines capital contributions, the right of first refusal, and ownership over assets like funds and real estate.

On the other hand, the agreement provides specific guidelines on what happens in case of winding up, liquidation, membership change, and other unique situations. This internal document is a comprehensive rulebook covering your bases in some legal disputes and everyday scenarios.

The operating agreement is applicable from the effective date designated in the document; usually the same day the LLC is officially formed. The agreement isn’t state-mandated but is legally binding for LLC members. Regardless of whether the law demands it, drafting this document will be one of the most critical steps when building a limited liability company.

Now that we’ve explained what an operating agreement is and its purposes let’s see what the state of Texas says about the document and what your company will get from it.

State Requirements

We’ve already determined that Texas state law doesn’t make an operating agreement necessary for LLCs. Once you create the document, you don’t need to file it with the state. Still, the law does state specific rules about operating agreements, particularly in terms of how they’re treated in legal situations.[2]

Firstly, the law states that the state will regulate the business aspects not covered by the agreement. In other words, if your internal document doesn’t outline what to do in certain situations, you must conform to state-defined regulations.

In the same vein, in the circumstances defined by the operating agreement, the agreement will take priority over state rules. Of course, for any section of the agreement to be valid, the document must be consistent with state and federal laws.

Interestingly, an operating agreement can allow certain rights to anyone, regardless of whether they’re among the people drafting and signing the document. 

LLC Operating Agreement Benefits

The operating agreement greatly benefits your business by defining the difference between member and company assets and, more importantly, their liabilities. In particular, the agreement reinforces that the LLC is a separate business entity, meaning its debt doesn’t directly affect the members.

It’s easy to understand why this aspect of the operating agreement is so important. If your company falls into financial trouble, the last thing you’d want is for those issues to spill over to your personal funds.

The agreement also brings advantages in terms of resource consolidation within your company. Since the document defines crucial roles and procedures, it makes daily operations more straightforward. Better yet, your business will have clear guidelines on what to do in specific situations, for instance, if an LLC member leaves the organization or dies.

Getting a bank loan will also be easier with an operating agreement. Many banks will ask to see the document before lending money to an LLC. Essentially, the agreement will provide the needed reassurance, showing the institution that your company means business. It will also help you open a business bank account faster.[3]

Taxation is also an area that the operating agreement can cover. The document can define tax liabilities for LLC members. This, in turn, can influence the total taxes paid by the members and prevent overtaxing them, making your LLC more profitable in the long run.

If you want to ensure all of the benefits of the document are available, you’ll need to ensure that the agreement is drafted and written correctly. To that end, you might do well to enlist the help of professionals. Swyft Filings can assist you in preparing an operating agreement that’s compliant and correctly formulated.

Who Needs an Operating Agreement?

In Texas and other states, operating agreements are primarily a matter of LLCs because it’s meant to organize the dealings of members.

Yet, you shouldn’t assume that the agreement is necessary only in multi-member LLCs. The document does outline the relationships between LLC members, but it also outlines their roles and responsibilities. In other words, a single-member LLC will also benefit from an operating agreement.

An LLC consisting of a sole member may be treated as a sole proprietorship in certain situations. The most crucial difference between these two organization types is that, in a sole proprietorship, the owner is responsible for company liabilities. Having an internal document defining your role as a member of the LLC helps avoid this potential complication.

Finally, as previously noted, you’ll need an operating agreement to have a structure tailored to your specific needs. Without the agreement, you’ll have to act according to state default rules, which may not be ideal for your circumstances.

Drafting Your Texas LLC Operating Agreement

When you start drafting your Texas LLC operating agreement, you’ll notice that the process becomes more complex as you move along. The good news is that there are no strict rules to follow when creating the document - as an internal matter of your company, the agreement doesn’t have to look a certain way or comply with administrative standards.

Yet, the document must contain specific sections and information and use clear language. If you know what this internal document should look like, you may attempt to draft the agreement yourself. Otherwise, you could use the numerous operating agreement templates online.

Finding the correct document format is relatively straightforward. Let’s see what should go into the agreement.

Step 1: Provide Business Information

The first part of your operating agreement will contain your essential business info. This will mostly be the same information that you’ll provide in the formative documents filed with the Secretary of State:

• Company name

• Registered agent name

• Business address

• Employer Identification Number (EIN)

Step 2: List LLC Members

Plenty of LLC operations revolve around the company members, so it’s no wonder your operating agreement should feature a member list. However, this won’t be a mere name and address listing - this section will be instrumental in defining what your LLC members own and their responsibilities.

Your LLC member list will distinguish between member and company assets. When the stakes are defined, members won’t experience personal financial loss due to the company’s affairs.

Likewise, the list will clarify ownership interest and define members’ roles in your LLC. This will simultaneously determine what members gain from the organization and how they contribute. As a result, your business can operate more efficiently and become more profitable.

Step 3: Decide Member-managed vs Manager-managed

You can organize your LLC operations in two ways: Your company can be manager-managed or member-managed. Each variant can be suitable for specific purposes, which will depend, among other factors, on the size of your LLC.

In a manager-managed LLC, an organization employee manages regular processes and operations. You can also entrust this role to a professional manager that doesn’t come from your original staff. Large-scale LLCs can benefit from this model since it allows members to focus on other business aspects.

On the other hand, the member-managed model means one of the members of the LLC assumes the leadership role. This managing member directs the company operations while still serving on the company’s board. This variant is more frequent in smaller LLCs that don’t require dedicated managerial staff.

Step 4: Lay Out Administrative Operations

Your operating agreement should also lay out how the business administration operates. In this section, you’ll define how the daily administration is conducted, accounting for numerous business aspects:

• Capital contributions

• Member voting rights

• Allocation

• Distribution

The advantages of administrative operation layout are numerous. With this section of the agreement in place, your legal dealings, tax returns, and business bank account affairs will be regulated internally, providing a comprehensible process for every eventuality.

Step 5: Add and Remove LLC Members

Lastly, the operating agreement should explain the procedures for changes in membership. If old members leave the organization or you want to get new members in, having a defined process for bringing about that business is pretty handy.

The agreement will outline what happens with indemnification, membership interest, and other member change or onboarding details.

Similar to other aspects of the operating agreement, this section will be valuable to both single-member LLCs and multi-member ones. In particular, if you start as a sole member of your LLC, it’s expectable that your organization will need to take in more members as it grows. This process will be easier if you have the appropriate procedures defined in the agreement.

Whether your LLC is growing from a single-member to a multi-member model or already has several members, dealing with membership will come with its share of legal complexity. Therefore, it’s advisable to seek legal advice for this section.

Create Your Operating Agreement Through a Filing Service

The process may seem straightforward if you look at the individual steps of drafting your Texas LLC operating agreement. As you delve deeper into the delicate nature of the document, you’ll likely find the task more demanding than you might’ve initially thought.

Swyft Filings can help you avoid headaches and second-guessing throughout the process. Our service is dedicated to making new businesses successful through efficient launching. This means we’ll help your LLC become functional and ready for business in the shortest time possible and with optimal results.

Start your business off on the right foot. File for your LLC through us today and include our LLC operating agreement add-on in your cart to ensure you have all your necessary documents at the outset.

On the other hand, you may already have a company. Swyft Filings can help you there, too. If you’re looking for the next step after forming your LLC, our LLC operating agreement service ensures you have a compliant document for conducting business in Texas. We can help you wrap up your legal documents so you can get going as soon as possible.

At Swyft Filings, we focus on providing the most precise and fastest service possible while not straining your budget. You’ll pay considerably less or only cover the necessary filing fees depending on your needs.

Don’t do all the heavy lifting yourself when getting your Texas LLC underway. Instead, contact the Swyft Filings specialists and let us take care of the essential documentation so you can focus on growing your company.

FAQs

Is an LLC Operating Agreement required in Texas?

The Texas Business Organizations Code doesn’t require you to have an operating agreement. Although the agreement isn’t legally mandated, drafting the document for your Texas limited liability company would be a good idea.

How does an LLC Operating Agreement help protect my assets?

Your limited liability company operating agreement defines the business as a separate entity from its members. This means the LLCs liabilities are considered independent of personal assets. If your LLC falls into debt, the members won’t need to cover the expense from their own funds. Plus, the agreement defines the share of each company member, making all ownership and financial details clear.

Who needs access to this document once it’s drafted?

The members of the LLC need to have access to the company agreement. This way, the stakeholders can have insight into the rules of operations in every situation. Since the operating agreement defines procedures both in daily and specific dealings, decision-makers in your LLC must be able to access the document whenever needed.

How do I edit information on this document if membership changes?

Members of your LLC can vote on implementing particular changes in the operating agreement. The voting mechanic is put in place so that no individual member can edit the document without input from other shareholders. This system helps protect ownership interests and keeps all members up to date with company operations.

What other legal documents do I need to draft for my Texas LLC?

Texas state law mandates several filings when forming an LLC. 

First, you must register a business name, ensuring it’s unique per state naming conventions. 

Then, you’ll have to file the Certificate of Formation with the office of the Texas Secretary of State. Registration with the IRS will be needed for tax purposes, as well as an Employer Identification Number. 

Finally, specific permits or licenses will be necessary for certain business types.

Bibliography

1. Texas.gov. “Starting a Business in Texas.” Accessed June 21, 2023.

2. Texas Public Law. “Texas Business Organizations Code, Section 101.052 - Company Agreement.” Accessed June 21, 2023.

Texas Registered Agent. “Texas LLC Operating Agreement.” Accessed June 21, 2023.