Filing a certificate of formation with the Texas Secretary of State is the first step to creating a limited liability company (LLC). A certificate of formation generally only provides the name of the LLC, names of members or managers, principal place of business, and purpose of the business. A certificate of formation does not include items like a description of how the business will operate, ownership percentages of the members or other detailed procedures for events such as winding up or default by members. An operating agreement is an important document that outlines the key structures and procedures of the business.
Although Texas Law does not require LLC’s to have a written operating agreement, it is unwise to establish a LLC without one. An operating agreement is a binding contract between the members of an LLC that sets forth the specific rights and responsibilities of each member including profit and loss allocation, voting rights, contributions, departures, buyouts, and dissolutions. Unless a company agreement provides otherwise, members may not withdraw or be expelled by the other members. TBOC § 101.107 (West 2017).
When LLCs fail to establish operating agreements, statutory rules govern. TBOC § 101.052 (West 2017). For example, the Texas Business Organizations Code provides that profits and losses of a LLC shall be allocated to each member of the company according to the agreed value of the member’s contributions as stated in the company’s records. TBOC §§ 101.201, 101.203 (West 2017). If there is no agreed value in the company’s records, members are exposed to ambiguity that tends to lead to litigation.
Many of our clients come to us only after facing significant internal problems with another LLC member. We often find that these clients never consulted an attorney during the LLC formation process and no operating agreement exists. These clients are then forced to pay substantial sums of money to litigate issues that could have been prevented by hiring an experienced business attorney during the company formation process. A well written operating agreement helps to avoid costly litigation and ultimately protect members of a limited liability company.
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