An operating agreement is the governing document of a limited liability company (LLC). Although Texas law does not require LLCs to have operating agreements, they play a critical role in preserving relationships among members and advancing key business objectives. Working with the right law firm, you can develop an effective operating agreement and avoid common mistakes that could threaten the viability of your business. Count on the trusted counsel of Capstone Legal Strategies.
Understanding Operating Agreements
LLC members have various rights and responsibilities. Clearly defining each member’s role in the company and spelling out other important details can help avoid needless disputes and help ensure the LLC is successful. An operating agreement meets these goals by including terms that address the following matters, among others:
- Basic identifying information: The formal legal name, its principal address, and its registered agent and its address may be written here. The business might also list its initial members in this section.
- Statement of business intent: Here, the agreement will specify that the LLC was created in accordance with the laws of Texas and that it will formally come into existence once all necessary documents have been filed with the state.
- Business purpose: Defining the business purpose may seem relatively straightforward, but it is important to accurately explain within the operating agreement what the LLC actually does. References to the nature of the business and its industry are helpful.
- Member contributions and ownership interests: Each member of an LLC brings contributions to the business such as money or services. These, in turn, affect each member’s ownership interest in the company.
- Profit and loss sharing: The LLC should make it explicitly clear how net profits of the business will be shared among members. Equally important is to dictate how losses will be allocated. The agreement can use virtually any criteria imaginable to define such matters.
- Decision-making process: This section explains how to make major decisions that affect the LLC and contractually bind it to perform certain duties. There may be a voting process or the agreement may delegate the responsibility of certain decisions to certain members.
- Membership changes: Procedures for adding new members are specified here, along with how to handle the death or other departure of a member. Existing members, for instance, will likely want to purchase a departing member’s interest before someone else can be allowed to buy it, so this right of refusal should be clarified.
- Meetings and communications: Specifics about how and when meetings should be held need to be listed, along with acceptable means of meeting (e.g. Zoom calls) and meeting minutes. Rules about communications, for instance using email or phone calls, are also included here.
- Dispute resolution methods: Disagreements among members are inevitable, but the LLC should have built-in dispute resolution methods to ensure these situations do not threaten the company’s viability. For example, the agreement may contain mediation terms.
- Term: An LLC may exist for a set amount of time or only to achieve a particular purpose. On the other hand, it may continue in perpetuity unless and until it is terminated by way of the operating agreement or law.
- Dissolution: Procedures to dissolve the LLC should be detailed, but so should steps to wind down the operation of the business. The operating agreement should explain how outstanding liabilities and legal obligations will be handled in the event the LLC is terminated.
How to Craft an Effective Agreement
In developing an agreement that fits your organization, our law firm takes the following approach:
- Conducting a comprehensive evaluation of your LLC: It is not possible to know which terms to include in or exclude from an operating agreement without first gaining a deeper understanding of how the LLC works. To learn these details we meet with the members of the LLC and study internal records that may be relevant.
- Discussing past and ongoing problems: If your LLC is already operating without an agreement in place, we can take a look at issues that your business has dealt or is currently dealing with. These disputes will prove invaluable in crafting a customized operating agreement.
- Avoiding vague or ambiguous terms: The last thing that any LLC wants is ambiguous or vague operating agreement terms. These are fertile grounds for disputes, disagreements, and even lawsuits, all of which will jeopardize the success of the business.
- Applying our knowledge and experience: Our firm understands the relevant laws that govern LLCs, and the operating agreement must be drafted in light of these rules. We also apply our experience that has been gained from working with many other satisfied clients.
Common Mistakes to Avoid
As you work towards developing your operating agreement, you should avoid these pitfalls:
- Waiting to create an agreement: Some LLCs are so enthusiastic about launching their business that they forgo drafting an operating agreement. Putting off this critical step will only invite problems and make it much more difficult to resolve them.
- Using forms and templates: It is tempting to use pre-written operating agreement forms and templates that can be found online. However, many of these are riddled with errors, do not comply with Texas law, and will not suffice to handle the unique challenges and needs of your LLC.
- Including poor language: As mentioned above, vague and ambiguous terms can undermine the usefulness of an operating agreement. With seasoned legal counsel by your side you can avoid this issue and make sure all members understand their rights and obligations.
- Missing important details: To ensure your operating agreement is the best it can possibly be, proper attention must be given to critical details. For instance, which decisions (such as selling or purchasing significant assets) require a higher approval threshold versus more routine, everyday matters? And how will the agreement reflect the difference?
- Not updating your operating agreement: Your LLC may already have an operating agreement, but with changing laws and regulations it could be outdated. Our firm can help you modify an existing operating agreement to ensure it remains effective.
- Not retaining legal counsel: Finally, it is risky to not have legal assistance with drafting your operating agreement. Invest in the success of your LLC by retaining a skilled business lawyer to help.
Contact Our Houston Operating Agreements Attorney
Whether you have never adopted an operating agreement for your LLC or it has been a while since yours was updated, Capstone Legal Strategies is here to serve you. Find out why Houston LLCs depend upon our counsel to guide them. You can get started by calling us to schedule your initial consultation today.