Creating a limited liability (LLC) structure for your business in Texas is a smart move for any entrepreneur. It provides your business with protection and flexibility, while simplifying administrative and legal processes. However, an LLC without a good operating agreement (also called a company agreement) is nothing but a shell. Here’s why.
The role of an operating agreement
An operating agreement is a legally binding contract between the members (owners) of an LLC that outlines each member’s rights, duties, and responsibilities. It acts as an internal guide for governing and managing your LLC.
Basically:
- It clarifies ownership roles and responsibilities among members, avoiding confusion and potential conflicts in the future.
- It provides a framework for decision-making processes within the LLC, ensuring that members make important business decisions in a structured and organized manner.
- It outlines the financial arrangements of the LLC, including capital contributions, profit-sharing agreements and distributions, providing transparency and accountability among members.
- It protects the limited liability status of an LLC by demonstrating that it is a legitimate business entity with proper structures in place.
What to include in an operating agreement
If you’ve decided that an LLC business formation is the perfect structure for your new venture, then creating a comprehensive operating agreement should be your next step. There are some key elements that you must include. One is ownership and management. This section outlines the ownership percentage of each member, the roles and responsibilities of each member, and the decision-making processes within the LLC.
The financial provisions section covers initial capital contributions, profit distribution, and financial reporting. It is important to clearly outline how you’ll divide any profits among members to avoid conflicts in the future.
Another crucial aspect to include is buyout and dissolution. This spells out the procedures for buying out a member’s interest or dissolving the LLC altogether. This is important in the event a member wants to leave the LLC.
It is important to note that Texas law doesn’t mandate business owners to have an operating agreement for their LLC. But it does respect contracts. If you and your business partners create an operating agreement, you can make the best decisions for your business as long as they do not violate any laws. In case of any disputes, you can even use the operating agreement as evidence in court.
