The contents of a Texas LLC operating agreement are governed by Texas State law. What provisions can and must be included in an LLC operating agreement are matters specifically addressed by Chapter 101 of Title 3 of the Texas Business Organizations Code.
This Article will describe the Top 10 provisions to include in your Texas LLC operating agreement. Some of these provisions should be included in your operating agreement because it is wise to include them. Others must be included for the agreement to be valid and enforceable under Texas law.
First, what is an LLC? And what is an LLC’s operating agreement, exactly?
What Is a Texas LLC Operating Agreement?
An LLC is a limited liability corporation. Nearly every state allows registration and formation of such entities, and Texas is no exception.
The LLC’s operating agreement (or “company agreement”) is the underlying contract between the Members (owners) of the LLC as to who does what, who is entitled to what, and who can exercise which level of authority on behalf of the LLC.
It governs the relations among the members, officers, managers, and other principals of the company, as well as those of assignees of the company and even the company itself. It is enforceable against the members of the LLC—and against the LLC itself.
If a provision does not run contrary to Texas State law, it can be included. But which provisions must or should be included in a Texas LLC operating agreement?
1. Irrevocable Power of Attorney Provision
An initial power of attorney provision will grant the LLC or any of its members, officers, directors, employees, or agents the power to act on behalf of the organization with regard to the organization, internal affairs, or termination of the LLC.
2. Membership Provisions
An owner of an LLC is called a “member,” as noted above. The Texas LLC operating agreement should contain a number of provision defining membership, the qualification for membership, the effective date of a grant of membership to an individual, the mechanisms for issuance of membership interest after company formation, the assignment of membership interest, the mechanisms for removal of membership, and the effects of death, divorce, or a judicial charging order upon a member’s interest.
3. Parties to Action Provision
A Parties to Action provision stipulates that an LLC member can only be named as a party in an action by or against the LLC if the action is brought to enforce the member’s rights or liabilities to the company.
4. Liabilities for Obligations Provision
This provision is key in immunizing members of the LLC from personal liability. The Liabilities for Obligations provision specifies that members will not be liable for debt, obligations, or other liabilities—including court judgments—of the LLC.
5. Contributions and Enforceability of Promises of Members Provisions
Any requirements for members to pay cash or to transfer property, or fulfill other obligations, to the company must be present in writing and signed by the obliged member to be enforceable. These provisions ensure that such obligations—often required for membership—are binding.
6. Allocation of Profits and Losses Provision
What’s in it for the LLC’s members? The Allocation of Profits and Losses provision stipulates the benefits to be received by members—as well as the burden of losses.
7. Management Provisions
How is the company to be run? By whom, exactly?
The Management provisions will stipulate which managers and members comprise the governing authority of the LLC and how those individuals may designate committees to exercise their authority, as well as how, when, and to whom that authority may be delegated.
These provisions also allow for the designation of agents with the power to bind the LLC to contracts and agreements.
8. Meetings and Voting: Notice & Quorum Provisions
LLCs and all other corporate entities need to occasionally make decisions about a course of action which may potentially affect the members’ or shareholders’ investment value.
The Texas LLC Operating Agreement will always need provisions describing the notice requirements, quorum requirements, voting rights among members, the minimum number of votes to approve certain actions, and more.
9. Derivative Proceedings Provisions
LLCs and other corporate entities are separate legal persons. Just like actual persons, legal persons will need to commence or defend litigation from time to time.
The LLC Operating Agreement’s Derivative Proceedings provisions will define the scope of the LLC’s ability to file lawsuits, make legal demands, provide the basis for the LLC’s standing before judicial tribunals, and to pay for such legal activity.
10. Winding Up and Termination Provisions
All things must pass, and so, occasionally, do LLCs. This possibility should be forecast from the get-go. The Winding Up and Termination provisions specify the conditions under which a closure may occur, the responsibility for the winding up of the company, and the approval required from the membership to do so.
Texas LLC Operating Agreement Provisions: The Bottom Line
The bottom line is that these are just a few of the provisions that can or even should be included in a Texas LLC operating agreement.
If you are forming an LLC or other corporate entity, your first step should be to consult an experienced Texas business attorney to determine the optimal contents of your LLC operating agreement.
Contact us now to schedule your initial appointment.