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Does your LLC need an operating agreement?

Starting a new business often involves significant document preparation, and you may wonder if you can forgo some of the steps involved in the interest of saving time and money. The short-term solution would be to file and prepare only the minimum to begin operations. The long-term advice is to plan and budget for a robust set of documents which clearly describe all interactions between parties.

If you form an LLC, Texas state law does not require that a limited liability company draft, sign or maintain an operating agreement other than the statutory template agreement provided as a default. However, your business may not fit the standard terms. Each business will have unique partners, financing, or contractual risk that should be clearly written down to reflect your intentions. If you value the time and energy in forming the business, you and your co-owners should memorialize the terms of the partnership because it may help prevent future disputes among the owners of the LLC and protect your limited liability status in the courts.

The purpose of an operating agreement is to govern the workings of your business, particularly as it pertains to owners' rights and responsibilities, what percentage of the business makes up each co-owner's share and how to split the business' profits and losses. The latter is particularly important. If you do not write your own rules regarding how your LLC will split profit and loss from your business, the state may impose default rules regarding an even distribution. This arrangement may not work best for your business, but you can agree to an alternate split among co-owners in your operating agreement to bypass the default rules.

The advantage of having an LLC is the protection it affords you and your co-owners from personal liability for business-related debts. However, should a legal matter arise, the court may not recognize your limited liability status if you do not have an operating agreement in place. An operating agreement also clearly delineates what the expectations are for each co-owner of the business, which can help prevent misunderstandings and disagreements from arising or escalating among owners.

The information in this article is not intended as legal advice but provided as a general overview for research purposes only.

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