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What Happens if I Don’t Have An Operating Agreement For My LLC?

Business Law Tips & Advice

Attorney Nate Gilbert

The short answer is that you will need to reference the Texas State statutes (or the statutes for whichever state your LLC is registered in) for the management of your business.

Your LLC should always have an operating agreement, but a lot of times, this is not the case.  It is not the end of the world, and your business is not “invalid” just because you do not have an operating agreement.  Operating agreements are not required for LLCs in Texas, and you do not need to file anything with the State regarding your operating agreement.

A rock solid operating agreement is the foundation of every successful LLC. If you don’t have one for your business, it is never too late.

A rock solid operating agreement is the foundation of every successful LLC. If you don’t have one for your business, it is never too late.

An operating agreement is a contract between you, the organizer of your company, and your company.  This contract details how you are going to operate the company and what procedures must be followed in the conduct of daily business and any changes that can be made to the company.  Failing to follow this contract can result in increased personal liability for you—the corporate formalities contained in the operating agreement are the factors that a judge will look at in deciding whether the company is a legitimate business or simply a transparent device used to insulate the owner from liability without any individual identity of its own.  This is also a good reason to not have an overly complicated operating agreement from a free online form that you don’t understand.

But what if you don’t have an operating agreement? The answer is: Statutes.  If you do not have an operating agreement for your LLC, Texas Business Organizations Code, Chapter 101 governs the founding, structure, management, and conduct of LLCs in Texas.  In order to take any actions, you’ll need to consult the statutes to ensure that you are following the correct procedures.

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Understanding the Texas LLC Operating Agreement

An LLC, or Limited Liability Company, is a popular business entity choice in Texas due to its flexibility and liability protection. One crucial document that forms the backbone of an LLC is the operating agreement. In this article, I want to go over the key considerations a Texas LLC operating agreement, discuss the essential sections and clauses, highlight the benefits of having one, and touch on legal requirements and best practices.

Creating and Maintaining a Texas LLC Operating Agreement

When forming a Limited Liability Company (LLC) in Texas, drafting your operating agreement is a critical step that shouldn’t be overlooked. No, it is not required by Texas law to have an Operating Agreement, but very few if any legal resources are going to actually recommend working without a net in this instance. Let’s dive into everything you need to know about this contract.

Importance of a Texas LLC Operating Agreement

  1. Clarity and Structure: An operating agreement provides a clear framework for how the LLC will operate, including decision-making processes, member responsibilities, and management structure.  The contract will answer the basic questions: What happens if/when… Who is in charge of…. How do I….
  2. Legal Protection: Your Operating AgreementIt helps protect the limited liability status of the members of the LLC by demonstrating that the entity operates as a distinct legal entity from its members.  
  3. Conflict Resolution: The agreement outlines procedures for resolving conflicts and disputes among members, reducing the likelihood of costly legal battles.
  4. Customization: It allows you to custom tailor the LLC’s internal workings to fit the specific needs and goals of your business, including the roles and duties of Members and Managers, and how those can evolve over time.
  5. Compliance: While not required by Texas law for all LLCs, having an operating agreement can demonstrate compliance with legal formalities, which is crucial in legal proceedings and tax matters.

Key Components of a Texas LLC Operating Agreement

  1. Members and Ownership: Here, you define who the LLC members are, their ownership percentages, and their roles and responsibilities within the company.
  2. Management Structure: Specify whether the LLC will be member-managed or manager-managed. In a member-managed LLC, all members have the abiilty to act on behalf of and bind the company in a contract, while in a manager-managed LLC, managers (who may or may not be members) handle day-to-day operations.  This can be a crucial decision to the future of your company and should not be taken lightly.
  3. Decision-Making Procedures: Detail how major decisions will be made, such as changes to the operating agreement, admission of new members, or sale of assets.  Voting requirements such as Majority or Super Majority can be a critical component of maintaining control over your company in the future.
  4. Financial and Taxation Matters: Describe how profits and losses will be allocated among members, how taxes will be handled, and the procedure for financial reporting.
  5. Dissolution and Exit Strategies: Outline the process for dissolving the LLC or handling the departure of a member, including buyout provisions and dispute resolution mechanisms.

Benefits of Having an Operating Agreement

  1. Clarity and Consensus: A well-drafted operating agreement clarifies roles, responsibilities, and decision-making processes, reducing misunderstandings among members.
  2. Asset Protection: By outlining liability limits and indemnification provisions, an operating agreement helps shield members’ personal assets from business debts and obligations. It may sound odd, but if your LLC does not actually provide for limited liability of Members, you may not enjoy that protection under Texas law.
  3. Legal Compliance: Having an operating agreement demonstrates that your LLC is operating according to established rules, which can be crucial in legal disputes or audits.
  4. Flexibility and Customization: You can tailor the operating agreement to suit your LLC’s unique needs, adapting it as the business grows or circumstances change.

While Texas law doesn’t require LLCs to have an operating agreement, it is highly recommended to have one for the reasons outlined above. Best practices include:

  1. Consulting Legal Professionals: Work with an attorney familiar with Texas LLC laws to draft or review your operating agreement.  Most attorneys will have the ability to do this, but working with a lawyer who actually practices in this area can mean a drastic difference in representation.
  2. Regular Updates: Review and update the operating agreement periodically to reflect changes in the business or legal environment.
  3. Documented Procedures: Maintaining thorough records of meetings, decisions, and transactions is absolutely critical to uphold the integrity of the operating agreement.  When working with clients, I continually harp on the idea that businesses must have business records if we are going to call them businesses when it matters.

On the bright side, if you don’t have one and you feel like you need one, you can adopt an Operating Agreement for your LLC at any time!

 Operating agreements can be a tough hurdle for small business owners.  If you have an idea for a business, the last thing you want to be doing is looking online through statutes and forms for the correct procedure on holding corporate meetings.  San Antonio small business attorney Nathaniel Gilbert takes care of the paperwork for businesses in Texas.  With an operating agreement that is not only affordable but easily understandable, business owners will be able to run their corporation without opening themselves and their companies to needless liability exposure.  For a free consultation on operating agreements in Texas, Call Now or Contact Nate.

FREQUENTLY ASKED QUESTIONS

  1. What is an operating agreement for a Texas LLC, and why is it important?

An operating agreement is a legal document that outlines how a Limited Liability Company (LLC) in Texas will operate, including its management structure, decision-making processes, and member responsibilities. It is crucial as it provides clarity, protects the LLC’s limited liability status, resolves conflicts, and demonstrates legal compliance.

  1. Do all Texas LLCs need an operating agreement?

While Texas law does not mandate LLCs to have an operating agreement, it is highly recommended to have one as it offers numerous benefits and legal protections. It also helps in avoiding misunderstandings among members and demonstrating compliance with legal formalities.

  1. How can I create and maintain a Texas LLC operating agreement?

To create an operating agreement, consult with a legal professional familiar with Texas LLC laws. Regularly review and update the agreement to reflect any changes in the business, membership structure, or legal requirements. Ensure all members understand and agree to the terms outlined in the operating agreement.

  1. What benefits does an operating agreement provide to a Texas LLC?

An operating agreement offers benefits such as clarity in roles and responsibilities, asset protection by defining liability limits, legal compliance, flexibility for customization as the business evolves, and consensus among members, reducing misunderstandings and conflicts.

  1. Can an operating agreement be amended or revised?

Yes, an operating agreement can be amended or revised as needed. Any changes should be documented properly, and all members should agree to the amendments. It’s important to follow the procedures outlined in the existing operating agreement for making revisions.

Ready to Protect Your Texas LLC? Take Action Now!

Are you ready to safeguard your Texas LLC and ensure smooth operations? Don’t wait until issues arise—take action now with the expertise of The Law Office of Nathaniel Gilbert, PLLC. Specializing in Texas LLCs and can help you create or update your operating agreement to meet legal standards and protect your business.

Here are the steps:

  1. Consult: Reach out to The Law Office of Nathaniel Gilbert, PLLC, for expert guidance on drafting or reviewing your operating agreement.
  2. Review and Update: If you already have an operating agreement, schedule a review to ensure it reflects your current business structure and goals.
  3. Stay Compliant: Work with Attorney Nathaniel Gilbert to ensure your operating agreement aligns with legal requirements and best practices, protecting your LLC’s interests.
  4. Communicate with Members: Keep all LLC members informed about the operating agreement’s terms and any updates or amendments.

By taking proactive steps to establish and maintain a robust operating agreement, you’re not only protecting your LLC’s assets but also setting the stage for successful and harmonious business operations. Don’t delay—act now to secure your Texas LLC’s future with Attorney Nathaniel Gilbert’s legal knowledge!

Nathaniel Gilbert

Nathaniel Gilbert is the sole attorney at The Law Office of Nathaniel Gilbert, PLLC. Practicing in the areas of Business Law, Nate assist clients with LLC formation and drafting contracts in the states of Texas, Colorado, and Kansas. He can be reached at 726-999-0087.

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