If you’re starting a business and forming a limited liability company (LLC) in Texas, you’re not required to have a company agreement, but it’s a good idea to have one in your records. In most states, a company agreement is known as an operating agreement.
A company agreement is significant if your LLC has more than one owner, or member, as it establishes ownership shares, profit and loss distributions, and member roles and responsibilities.
Why You Need a Company Agreement
A smartly drafted company agreement can help you in many situations, such as when your LLC merges with another business or a member is no longer capable of working.
The company agreement establishes each member’s ownership share in the LLC, profit and loss distribution percentages, and how proceeds will be divided if the business is sold. A company agreement also defines how decisions and member disputes will be resolved.
It also defines each member’s role and responsibilities and how the LLC is managed, clarifying who oversees which aspects of LLC operations.
Texas laws will apply by default without a company agreement, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the Texas Company Agreement Include?
The Texas Operating Agreement designs the internal protocols of an LLC within the state. To facilitate harmonious operation and address possible disagreements, one should be familiar with its essential components.
- Each member’s rights and responsibilities: Explicitly detail what is expected of each member. Texas law allows flexibility, so you can mold roles to fit your business’s specific needs.
- Capital contribution requirements for each member: Outline the amount and type (cash, property, services, etc.) of initial contributions and address any potential future contributions.
- Procedures for adding and removing members: Texas law typically requires the unanimous consent of members to admit new members unless the operating agreement specifies otherwise.
- What happens when a member sells their interest, becomes disabled, or dies: Texas does not automatically allow the transfer of a member’s management rights. Ensure you provide clarity on these circumstances in the agreement.
- Conditions under which a member might become bankrupt or insolvent: Describe how the LLC will handle a member’s bankruptcy or insolvency.
Management and Voting:
- Management structure and roles of members: Texas LLCs can be member-managed or manager-managed. Specify which structure you are adopting and define roles accordingly.
- Voting rights of each member: Texas generally defaults to per capita (one vote per member) unless specified differently in the operating agreement.
- Rules for meetings and voting: Lay out procedures for holding regular and special meetings, including notice requirements and quorum.
- Rules for managing potential conflicts of interest among members: Implement policies to ensure transparency and ethical business conduct.
- Allocation of profits, losses, and distributions: In the absence of an agreement, Texas follows capital contributions for allocations. State your chosen method if it deviates from this.
- Provision for periodic financial audits or reviews: Address any intentions to conduct internal or external financial reviews.
- Tax treatment of the LLC: Specify if the LLC will use the default pass-through taxation or if it will opt for corporate taxation.
Changes and Amendments:
- Process for amending the operating agreement: Define the required vote (majority, supermajority, unanimous) for making changes.
- Guidelines for company management during transition events: Detail leadership shifts, asset sales, or other pivotal business situations.
- Conditions under which the LLC might be sold or merged: Specify member voting requirements and procedures for major business decisions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Consider recommending Texas-based mediation to keep proceedings local.
- Guidelines for non-compete and confidentiality agreements: Non-competes must be reasonable in time, geographical area, and scope of activity to be enforceable in Texas.
- Provision for indemnification and limitation of liability: Define circumstances where members are shielded from personal liability.
Record Keeping and Communication:
- Details about record keeping requirements: Ensure compliance with Texas’s record-keeping mandates, like maintaining lists of members and capital contributions.
- Guidelines for how company-related decisions will be documented or communicated: Promote transparency and clear communication within the LLC.
Company Information and Dissolution:
- Description of the business’s purpose and activities: While Texas doesn’t necessitate an explicit purpose, you can provide specificity if desired.
- Identification of the registered agent and office: Every Texas LLC requires a registered agent within the state. Declare this information in your agreement.
- Procedures for dissolving the LLC: Ensure alignment with Texas statutory requirements, including requisite notices and settlements.
- Procedures for winding down or liquidating the company’s assets: Describe the order of distributing assets after settling all obligations.
How to Draft a Texas Company Agreement
You can find company agreement templates online from services like ZenBusiness, which will ensure the standard legal language and allow you to fill in the blanks. You’ll probably be able to find free templates online as well, but it’s advisable not to use those as they may include errors.
Consider having an attorney draw up your company agreement if your business has multiple members. An attorney will ensure that all bases are covered, and all member’s rights are protected. They can also include language that is specific to Texas laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Formation vs. Company Agreement
The company agreement should not be confused with your LLC’s certificate of formation. The certificate of formation officially forms your LLC with the state and includes no information about member roles or financial interests. Though you can have additional provisions to your certificate of formation, these are legally considered part of your company agreement.
Also, the certificate of formation is filed with the state and is part of the public record, while a company agreement is kept in your LLC’s records and referred to as needed.
Keep Your Texas Company Agreement Up to Date
It’s a good idea to periodically review your company agreement. Circumstances change, and the safest approach is to ensure your company agreement is entirely up to date. In Texas, you can only amend your company agreement with unanimous member consent.
Don’t Skip the Company Agreement
You’re not required to have a company agreement in Texas, but the wise entrepreneur would never do business without one. It’s a document that could be critical to the future of your business. You may think a dispute will never arise, but times and people change.
You don’t want to end up in a bitter court battle because you pushed off creating a company agreement. It’s a document that will protect the rights and interests of your LLC members and ensure smooth, continued operations in the event of any unexpected hurdles or pitfalls.
Does an LLC company agreement need to be notarized in Texas?
No, company agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if a Texas LLC does not have a company agreement?
Texas default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.