An Operating Agreement is a contract document which is considered as a key document used by a limited liability company (LLC) as it provides an outline of the financial and functional decisions of the business which includes its regulations, provisions and rules. Its purpose is to be a guide and to govern the internal operations of the business in such a way that it is compatible with the specific needs of the owners. Once the operating agreement is signed by the members of a limited liability company, it functions as the official contract which binds them to the agreed terms and conditions.
A Texas LLC operating agreement can delineate the company's procedures, policies and other features. While this document is not required by law, without it in place, the members can be held personally liable in an event of a lawsuit. The existence, therefore, of an operating agreement will ensure that the personal assets of the LLC owners will be protected from business liabilities.
How important is an operating agreement?
- It can be used to protect the limited liability status of the business as it provides its member's protection against personal liability to the LLC. Without this operating agreement, your LLC can appear as though it is a sole proprietorship or a partnership which in turn can jeopardize your personal liability.
- It will protect your agreement in the eyes of your state as more often, state default rules govern LLCs without an official operating agreement. Otherwise stated, each state outlines default rules which are applicable to businesses which do not have an operating agreement, and because they are more often too general, it is not safe nor advisable to rely on the state to manage your agreement.
- An operating agreement can assist in clarifying verbal agreements. Although members have already agreed to certain terms, misunderstanding and miscommunication can still happen. It is therefore for the best interest of each business member to have the operational conditions and other business arrangements handled in writing so they can be consulted should any conflict arise.
What must be included in an operating agreement?
The range of operations in the internal affairs of the business is outlined in the operating agreement and normally includes the following information:
The company name
The effectivity date of the document
The business address
For a multiple-member LLC, the capital contribution amount and the distribution percentages for each member
Procedural details for:
A. Interest assignments B. Date of annual meeting C. Property ownership of the company D. Right of first refusal E. Admission of new members F. Withdrawal events G. Member representation H. Notices I. Arbitration J. Liquidation and dissolution K. Voting rights and responsibilities L. Powers and duties of members and managers M. Buyout and buy-sell rules N. Indemnification O. Amendments.
Each member of the LLC must sign the document to show their consent together with the company representative.
The state of Texas does not require an operating agreement for a business to engage in trade; however, it will be unwise to operate a business without an operating agreement as it is designed to protect your personal assets in the event that the company incurs liabilities. The operating agreement should be kept together with the important records of the company as they are not required to be filed, nor will they be accepted by the state of Texas when you register your business. It is simply undertaken to ensure the protection of the members of the LLC and this operating agreement should be kept confidential between the members of your LLC.
Contact us today and our team will be more than happy to assist you in formulating your business' Operating Agreement ensuring that your business interests are duly protected and your legal rights fully covered.