Operating Agreements for Limited Liability Companies.

Many business owners create limited liability companies (LLC's) with the intention of having a business structure and protecting their personal assets from any business-related liabilities.

It is very easy to create an LLC in Texas and many founders do so themselves or with the help of their accountant or attorney. However, what many business owners don't realize is that creating an LLC without having a well-drafted operating agreement or company agreement in place greatly reduces the benefits of the entity. This is especially true for an LLC with more than one member, i.e. a multi-member LLC.

An operating agreement works the same way as an operations manual for an appliance, or the sheet of paper with a Lego set that tells you which piece goes where. Can you imagine assembling a new WiFi router or a Lego castle without directions? Utter chaos!

An operating agreement is similar to the by-laws of a corporation and is usually the first document which will be brought up in a court of law in a case concerning an LLC. Without adapting an operating agreement, the provisions of the Texas Business Organizations Code are automatically applied to the LLC. The members therefore cannot go back and decide how the LLC should be governed.

An operating agreement should ideally have the following provisions in place to manage the operations and functioning of the LLC:

  • Identify the members of the LLC and clearly state their contributions, membership interests, and distribution plans;

  • Provide a succession plan for the business in case something happens to the members;

  • Provide a plan for the management, operation, and control of the LLC, especially in relation to big decisions like selling or buying assets, borrowing funds, etc.;

  • Set out procedures to add new members or allow existing members to withdraw from the LLC, and so on.

It is never too late to get an operating agreement drafted by your attorney, even if you have established your LLC a while back. If there have been substantial changes in your LLC since you set it up, get your operating agreement reviewed by an attorney to ensure it continues to protect you and your assets.

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