Texas LLC Operating Agreement Guide: What to Include

Introduction

When you form a Texas LLC, one of the most important documents you'll create is your operating agreement. While Texas doesn't legally require LLCs to have one, operating without an operating agreement is one of the biggest mistakes new business owners can make.

In this guide, we'll explain what an operating agreement is, why you need one, what it should include, and how to create one that protects your interests.

What Is an Operating Agreement?

An operating agreement is a legal document that defines how your LLC is owned, managed, and operated. It's an internal document—not filed with the state—that governs the relationship between members and the rules for running the business.

Think of it as the constitution of your LLC. It establishes the rules that everyone agrees to follow.

Who Needs an Operating Agreement?

Every LLC should have an operating agreement, regardless of:

• Number of members (single-member or multi-member)
• Size of the business
• Type of business activity
• Relationship between members

Even single-member LLCs benefit from an operating agreement because it reinforces the separation between you and your business—a critical factor for maintaining your personal liability protection.

Why You Need an Operating Agreement

Without an Operating Agreement

If you don't have an operating agreement, your LLC is governed by Texas's default LLC rules. These default rules may not match your intentions, and they don't address important specifics like:

• How profits are distributed
• How decisions are made
• What happens if a member wants to leave
• How disputes are resolved
• How the LLC can be dissolved

With an Operating Agreement

A custom operating agreement allows you to:

• Define ownership percentages and capital contributions
• Set rules for profit distribution
• Establish management roles and responsibilities
• Create procedures for adding or removing members
• Plan for dispute resolution
• Define dissolution procedures
• Protect your personal liability status

Important: Without an operating agreement, a court may determine that your LLC hasn't been properly maintained, potentially "piercing the corporate veil" and holding you personally liable for business debts.

What Should Your Operating Agreement Include?

A comprehensive Texas LLC operating agreement should address these key areas:

1. LLC Information

• The LLC's legal name
• Principal place of business
• Registered agent information
• Formation date
• Purpose of the business

2. Ownership Structure

• Names and addresses of all members
• Ownership percentage for each member
• Capital contributions (cash, property, or services)
• Additional contribution requirements
• Process for admitting new members

3. Management Structure

• Whether the LLC is member-managed or manager-managed
• Roles and responsibilities of managers
• Voting rights and decision-making procedures
• What decisions require unanimous consent vs. majority vote
• How managers are appointed and removed

4. Profit and Loss Distribution

• How profits and losses are allocated among members
• When and how distributions are made
• Whether profits are reinvested or distributed
• Tax treatment of distributions

5. Member Responsibilities

• Duties and obligations of members
• Time commitments and expectations
• Non-compete and confidentiality provisions
• Restrictions on competing businesses

6. Transfer of Ownership

• Rules for transferring membership interests
• Right of first refusal for existing members
• Valuation of membership interests
• What happens upon a member's death, disability, or bankruptcy

7. Dissolution

• Conditions under which the LLC can be dissolved
• Process for winding up the business
• How assets are distributed upon dissolution
• Distribution of remaining assets after debts are paid

8. Dispute Resolution

• How disputes between members are resolved
• Mediation or arbitration requirements
• Governing law (Texas)
• Venue for legal proceedings

Member-Managed vs. Manager-Managed LLCs

Your operating agreement should clearly define your management structure:

Member-Managed

All members participate in day-to-day operations and decision-making. This is the most common structure for small businesses where all owners are actively involved.

Manager-Managed

Members designate one or more managers to handle daily operations. This is ideal when some members are passive investors or when the business is large enough to warrant designated leadership.

How to Create an Operating Agreement

Option 1: Work with a Formation Service

The easiest and most reliable way to create an operating agreement is to work with a professional LLC formation service. Our Texas LLC Formation package includes a custom operating agreement drafted to meet your specific needs.

Option 2: Use a Template

While templates are available online, they're generic and may not address your specific situation. A one-size-fits-all operating agreement can create more problems than it solves.

Option 3: Work with an Attorney

For complex LLCs with multiple members, significant assets, or unique requirements, working with an attorney to draft a custom operating agreement is the best approach.

Operating Agreement Best Practices

Keep It Written

Verbal agreements are difficult to enforce. Always have your operating agreement in writing, signed by all members.

Be Specific

Vague language leads to disputes. Be as specific as possible about ownership, management, distributions, and decision-making.

Update It Regularly

Review your operating agreement annually and update it when circumstances change—new members, changed ownership percentages, new business activities, etc.

Keep It with Your LLC Records

Your operating agreement doesn't need to be filed with the state, but keep it with your LLC records and provide copies to all members.

Single-Member LLC Operating Agreements

Even if you're the sole member of your LLC, you should have an operating agreement. Here's why:

• Reinforces liability protection: It demonstrates that you're treating your LLC as a separate entity
• Banks may require it: Some banks ask for an operating agreement when opening a business account
• Investors may require it: If you seek funding, investors will want to see your operating agreement
• Defines procedures: Even a single-member LLC needs procedures for adding members or dissolving the business

Key Takeaways

• Every Texas LLC should have an operating agreement, even single-member LLCs
• Operating without one means you're governed by default state rules that may not match your intentions
• A comprehensive operating agreement covers ownership, management, profits, transfers, dissolution, and dispute resolution
• Your operating agreement should clearly define whether your LLC is member-managed or manager-managed
• Our LLC formation package includes a custom operating agreement
• Keep your operating agreement in writing, be specific, and update it regularly

Need Professional Help?

Don't operate your LLC without a proper operating agreement. Our Texas LLC Formation package includes a custom operating agreement drafted to meet your specific business needs.

Learn more about how to start an LLC in Texas and why choosing the right business structure matters in our LLC vs Sole Proprietorship guide.