Texas LLC Operating Agreement
An operating agreement is a contract signed by LLC members—and sometimes LLC managers—to provide for the governance and internal management of the LLC. The operating agreement defines the rights and obligations of the members and managers and serves as a blueprint for running the LLC. The document that most states call an operating agreement or an LLC agreement is called a company agreement under the Texas Limited Liability Company law.1 These three terms—company agreement, operating agreement, and LLC agreement—are synonyms.
What Issues Do Texas Company Agreements Address?
An operating agreement is a critical document for a Texas LLC’s formation. A Texas LLC’s company agreement governs the relationships among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself.2 A company agreement addresses important matters relating to the company’s internal affairs—governing issues like:
- Management of the LLC;
- Distribution of the business’s profits and losses;
- Contributions of members;
- Members’ rights to act for the business;
- Tax allocations;
- Addition of new members to the company and withdrawal of existing members; and
- Duties that the members and managers owe to each other and to the LLC.
Texas law gives an LLC’s members wide latitude to adapt their business’s operating agreement to the business model, management structure, and economic relationships of their choosing. A customized company agreement is what allows a Texas LLC to benefit from the high degree of flexibility that is a chief advantage of the LLC business structure.
Is a Company Agreement Required to Form a Texas LLC?
Under Texas LLC law, there are two main governing documents for LLCs:
- Certificate of formation. An LLC’s certificate of formation is an uncomplicated three-page document filed with the Texas Secretary of State to begin the LLC’s existence.3 A certificate of formation governs basic matters like the company’s name, registered agent, and management model (member-managed vs. manager-managed).
- Company agreement. An LLC’s company agreement is a private document that governs the relationships between the members and managers of the LLC, governance and management of the business, transfer of membership interests, the governance of the LLC, and other important matters.4 A company agreement is effectively a contract between the business owners and managers about how the company will operate.
A Texas LLC officially comes into existence when its certificate of organization is filed and effective.5 Texas LLC law does not technically require a written company agreement to form an LLC, but an LLC without an operating agreement is only partially complete. It exists as a matter of law, but important issues about the company are left unaddressed.
A company agreement tailored specifically to the business avoids confusion and lets members decide in advance how they will deal with certain issues. A company agreement reduces the risk of disputes between members and helps to avoid litigation if future disputes arise. A Texas LLC therefore can legally exist with no operating agreement, but it is not properly formed until the members adopt a company agreement that sets the ground rules for how the business will be managed and how the members will relate to each other and to the company.
How Does a Company Agreement Relate to Texas LLC Law?
Texas law is clear that an LLC’s company agreement—and not the provisions of the Texas LLC law itself—is intended to govern the operation of a Texas LLC. Under the Texas statute, “the company agreement of a limited liability company governs … (1) the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and (2) other internal affairs of the company.”6
Texas LLC law establishes default terms that fill in the gaps for LLC owners who neglect to create a company agreement. These default provisions apply only “to the extent that the company agreement … does not otherwise provide.”7 Members who create a company agreement can waive or modify most of the default rules—allowing the business owners (and not the State of Texas) to decide how their business will function. In other words, the company agreement is the LLC’s governing law. The Texas Limited Liability Company law is a backstop for LLCs that fail to plan properly.
Are There Texas LLC Laws that an Operating Agreement Cannot Waive or Modify?
While Texas law defers to the company agreement in most cases, there are a handful of provisions of Texas LLC law that a company cannot override. A Texas LLC’s company agreement cannot waive any of the following provisions of Texas law:8
- Rules requiring LLCs to have at least one member and exceptions to the rule;9
- Requirement that a promise to make a capital contribution or otherwise pay cash or transfer property to a company must be in writing;10
- Restrictions on distributions to members when a distribution will result in the company’s liabilities exceeding its assets;11
- Requirements that an LLC keep certain books and records at its registered office location and make them available if requested;12
- Laws that specifically apply to Texas series LLCs—subject to several exceptions allowing a company agreement to waive or modify certain provisions governing amendment of company agreements; members’ or managers’ status and distribution rights; distributions from an LLC to a series; events that require a series to wind up; and winding up a series LLC.13
- Chapter 1 of the Texas Business Organizations Code (Definitions and Other General Provisions);
- Chapter 2 of the Texas Business Organizations Code (Purposes and Powers of Domestic Entities)—except certain provisions relating to guarantees issued by the LLC;
- Chapter 3 of the Texas Business Organizations Code (Formation and Governance)—except that certain provisions relating to members, managers, and officers and to recordkeeping may be modified or waived;
- Rules for filing included within Chapter 4 of the Texas Business Organizations Code;
- Naming conventions and rules for registered agents and registered offices within Chapter 5 of the Texas Business Organizations Code;
- Chapter 10 of the Texas Business Organizations Code governing mergers, interest exchanges, conversions and domestications, and asset sales;
- Chapter 11 of the Texas Business Organizations Code (Winding Up and Termination)—except that a company agreement can waive or modify rules requiring an LLC to wind up upon termination of the membership interest of the last remaining member;
- Chapter 12 of the Texas Business Organizations Code regarding administrative powers of the Texas Secretary of State, Texas Attorney General; and State of Texas generally.
- Tex. Bus. Orgs. Code Ann. § 101.101(a)(1).
- Tex. Bus. Org. Code § 101.052.
- Tex. Bus. Org. Code § 3.005.
- Tex. Bus. Orgs. Code Ann. § 1.002(36). See also Tex. Bus. Orgs. Code § 101.052 (describing issues that the company agreement governs and modification by company agreement of default statutory provisions).
- Tex. Bus. Org. Code § 4.053.
- Tex. Bus. Org. Code § 101.052(a).
- Tex. Bus. Org. Code § 101.052(b).
- Tex. Bus. Org. Code § 101.054.
- Tex. Bus. Orgs. Code § 101.101.
- Tex. Bus. Orgs. Code § 101.151.
- Tex. Bus. Orgs. Code § 101.206.
- Tex. Bus. Orgs. Code § 101.501.
- See Tex. Bus. Orgs. Code §§ 101.601 – 101.636.