A limited liability company business structure can be an excellent choice for certain Texas operations where there are multiple owners. However, an operating agreement is a must. There should be a well-understood chain of command, as well as responsibilities within the company for each member. When grey areas exist, problems can arise. This is the primary reason that an effective operating agreement is needed for all parties, as it can help avoid litigation when a dispute between owners arises. There are other benefits to having an operating agreement as well.
Protects personal assets
A major issue that a sole-proprietorship or partnership faces is the possibility of the owners losing personal assets in the event the business gets sued. Even with sufficient general insurance protection in place, a judgment beyond the maximum coverage (or for liabilities not covered by insurance) could expose the owner’s personal assets to attachment. The limited liability (or LLC) business structure allows the company to operate as an entity, separate from the owners.
Pass-through taxation
Another benefit for the owners of an LLC business structure is that the company does not pay taxes. Rather, income that is generated through the company is assigned to each member in accordance with their respective interests. Different members may earn different amounts, all of which is (or should be) stated in the operating agreement.
Exposure to state business law
An LLC that does not have an operating agreement is at risk (as are its owners) when legal disputes occur. Not only is the limited liability protection at risk, but the court system may make determinations about operations, ownership, and liabilities that are far different than contemplated when the owners started the business. A well-written LLC agreement is a binding and enforceable contract between the owners of the LLC. An operating agreement should establish rules for settling potential legal disputes without the need to go to court.
In addition to these protections provided by an LLC agreement, the agreement should also set voting rights within the company structure and establish buy-out rules in the event one member wants to leave the group for any reason. These provisions can be essential in keeping the company operating during a reorganization.
