What is the Operating Agreement?
Suppose you have already registered your business or are in the process of doing so, what can you do to protect yourselves in the event that something goes wrong? Sure, you have the limited liability veil accorded to you by the law. However, you have to go a step further by coming up with protective measures for your members. And this is by creating an operating agreement LLC Texas.
You might wonder what a Texas limited liability company operating agreement is and what business it has in your transactions. Well, an operating agreement is a contract undertaken by you and everyone else with ownership in the business. It goes into detail about who owns the business and who has management rights over it. That way, you can always refer to this internal document where there is a disagreement about who should be doing what and why.
Why does an LLC need an operating agreement?
You will need an LLC operating agreement for a bevy of reasons, among them:
- To benefit and protect yourselves. Suppose you get into some legal trouble without this document, generic rules would apply to you. These laws are quite general and would thus be to your disadvantage. You would find that some or all of you would end up bearing the brunt of the decision. Instead of letting the law take its course, you can get a head start by deciding what should happen in such events.
- To reduce disagreements. When you are all clear on who should do what and why, it becomes much easier to follow up on responsibilities and to hold people accountable for their parts. You will not go demanding that person X should do what person Y gets paid to do, and this makes it easier to streamline processes. If you think about it, an LLC operating agreement Texas also makes it easier for people to remain productive as they are clear about their roles.
- To protect you if you own the business alone. When you have many people owning a share in the business, even if it is just one person running it with you, the law looks at you as an LLC. But when you are alone, the boundary between LLC and sole proprietorship can become blurry. To ensure that you protect yourself, you need to have some rules in place that pertain to the business. That way, if anything goes wrong, the law can refer to Texas LLC operating agreement single member guidelines and you can avoid losing out.
- To transact with financial institutions. Every time you wish to transact or borrow money from the bank, the authorizers will ask for pertinent information as to who has the right to make such decisions. As such, having the guidelines in place ensures that you can move through these processes easily. You can even leave a copy with the institution to reduce the time spent deciding if member A can sign on behalf of the others.
- To attract more people to the operations. Before people buy into the company or partner with you in any way, they will want to have a look at any guidelines you have in place. These give them a feel of the business environment and can dictate if they would like to go into business with you. Without such a document, they may feel that they will not be as protected as they would like and this can make you lose out on good deals.
How can an operating agreement be drawn up?
You have three options when it comes to deciding on your guidelines:
- Yourselves- you already know what you would like to have as the baselines for your operations. You can stipulate roles based on these preferences, making it easier to get the processes done fast. The problem with this mode is that you can miss some loopholes. However, we will cover these in generation sites.
- Attorneys- you can also engage professionals who can draft the documents for you. The good thing with this approach is that they have tons of experience and can see areas you might not see. It is also important to engage professionals when you deal with highly specialized goods or services. On the downside, this approach can be quite expensive and might not be necessary in your case.
- Generation Sites- these are operating agreement template Texas sites where anyone can generate a document based on their preferences. The outcomes are often customized and can work for you. You can rely on e-forms or work with document generators. Either way, the details required are pretty much the same.
Let us take a look at what you would need to include in the operating agreement for LLC in the generation services, which also applies to if you draft the document by yourselves or using an attorney.
- You start by indicating where the business has its base, which in this case would be Texas
- The next step involves deciding if you will offer professional services. Whatever answer you gave during registration will also hold in this case. If you plan on providing such services, you should be clear about their nature and should also provide licensing documents to account for the same. If not, your operations would not be in line with the law.
- The name of the business and its location are also important. These should reflect what you indicated when registering the entity.
- You should also decide if there will be levels of membership. If there are any, you should show the distinctions of the levels and the rights accorded to people in the various levels.
- It is important to show whether the members are natural persons or legal entities as well as their names and addresses. For each member, the value of their contributions should be shown. It should also be clear as to whether people can contribute more in the future and what requirements would apply to such monies or assets. On this note, you should also agree on whether new entrants can enter the organization and what their rights would be.
- The goings-on of the organization should also be clear. For example, if you are to vote on an issue, do some people have more rights than others, and if so, what criteria are applicable? Also, how many meetings will you have? Are they necessary? How will you space the said meetings?
- You should be clear on who will take control of the business. It could be the members or you could designate a manager for this role.
- The taxation of the company also matters. You can work with the default option offered by the law or you can choose another option of your liking. Please note that you will also have to elect this option if you do not work with the default. You can also include when your financial year will end.
- Reporting to members is essential in keeping them up to date with their finances. You should be clear on which reports will be made available to members. Also, you should designate who is allowed to sign contracts on the behalf of all members. This can be one person or a group of persons. Please note that some issues require unanimous consent from the members and you should be clear about such circumstances.
- You can also include other details you deem important. For example, can members form competing businesses?
The agreement should finish up with signing dates and witnesses before signing the document and presenting a copy to the company records. All members should also have a copy.
For further help, you can refer to the templates below:
Our Texas LLC Member-managed Operating Agreement is available in 3 formats:
We also have a Texas LLC Manager-managed Operating Agreement available in 2 formats:
Can you open an LLC without an operating agreement?
Yes, nobody can get in the way of you registering and running your business, even without such operating agreement of LLC guidelines in place. Even so, it is always advisable to have some operating agreements LLCrules written down on paper to protect you if anything goes wrong.
Disputes Between Members in an LLC
Even with an operating agreement LLC in place, you might find that you have some squabbles in the organization. Instead of resorting to the court system where you will deal with default Judgment in Texas, you can try the following methods to work through your grievances:
- Mediation or Arbitration
They are not only cost-effective but they also help to preserve relationships among the members. Additionally, they allow you to deal with any problems away from the public eye.
What Rules apply to an LLC without an Operating Agreement?
Where no operating agreement for an LLC is in place, your organization will be subject to generic rules by the state, referred to as default definition laws. These are set out by the authorities and they guide how you will manage and dispose of assets in the event that things do not work out as planned. Unfortunately, these default laws are not favorable to everyone and could lead to the loss of assets.
What is the default law in Texas?
The default law definition laws apply to members’ rights. For example, by default, members cannot withdraw or expel others from the organization. Also, profits and losses are allocated based on member contributions as shown in the company records, which may not be fair to all as these records may not be present or accurate. In such cases, your chances of being disgruntled would be high. It is thus better to take hold of the reins from an early stage.