Entrepreneurs in Texas often choose to establish limited liability companies instead of corporations. C and S corporations have traditionally been the preferred structure for new businesses because they provide liability protection, but setting up a corporation is a complex process and the reporting requirements are strict. LLCs also protect personal assets when business owners are sued, but they are more flexible than corporations and easer to run. When entrepreneurs decide to set up an LLC, one of the first decisions they make is whether or not to draft an operating agreement.
LLC operating agreements
An LLC operating agreement is a legally binding contract that details the key elements of a business. LLC operating agreements prevent business law disputes between members because they memorialize verbal commitments and make each party’s duties and responsibilities clear. The provisions of an LLC operating agreement vary from business to business, but they usually cover:
• The percentage of the company that each member owns
• How profits and losses will be distributed
• The financial contributions made by each member
• When meeting will be held
• The rules for buying, selling or transferring membership
• The voting rights of each member
• The duties of members and managers
LLC operating agreements in Texas
Texas law does not require LLC members to draft operating agreements, but it puts rules into place for those that do. Written agreements must be signed by a member, manager or authorized officer of an LLC, but they do not have to be notarized. LLCs in Texas must have unique names that make clear that the company is an LLC, and they are required to appoint a registered agent with a physical address in Texas.
Avoiding confusion and preventing disputes
An LLC operating agreement is a legal contract that outlines how a company will be run. These documents let every member know what their responsibilities will be, specify how profits will be allocated and establish rules for buying, selling or transferring membership, which could avoid confusion and prevent disputes.