Managing Attorney
If you’re starting a limited liability company (LLC) in Texas, you may think forming the company with the Secretary of State is enough to protect your interests. However, one critical step often overlooked by small business owners is drafting a solid operating agreement.
At Capstone Legal Strategies, we help entrepreneurs in Houston and across Texas create tailored operating agreements that provide clarity, structure, and legal protection. In this article, we explain what an operating agreement is, why it’s essential, and how it helps safeguard your business.
What Is an Operating Agreement?
An operating agreement is a legal document that outlines the internal rules, management structure, and ownership arrangements of an LLC. It serves as the foundational document that governs how your business operates, similar to corporate bylaws or a partnership agreement.
Although not legally required in Texas, an operating agreement is strongly recommended—especially for LLCs with more than one member.
Key Protections an Operating Agreement Provides
Clarifies Ownership and Roles
An operating agreement outlines each member’s ownership interest in the business. This is particularly important if:
- Ownership is not evenly divided
- Members contribute different amounts of capital
- There are active and passive investors
The agreement also designates management responsibilities, whether your LLC is member-managed or manager-managed, so everyone understands their duties from the outset.
Prevents Internal Disputes
Without clear expectations and guidelines, disagreements between members can lead to legal battles or even dissolution of the business. An operating agreement helps prevent this by:
- Setting rules for voting and decision-making
- Defining procedures for handling disputes
- Specifying how profits and losses are shared
By putting these details in writing, you create a reference point for resolving disagreements before they escalate.
Outlines Procedures for Adding or Removing Members
Membership changes are inevitable. Whether you’re bringing on a new partner, handling a member’s exit, or transferring ownership due to death or incapacity, an operating agreement spells out the process.
Typical provisions include:
- Buyout terms
- Valuation methods
- Transfer restrictions
- Death or disability clauses
Having a plan in place ensures continuity and minimizes disruption to business operations.
Protects Limited Liability Status
One of the primary advantages of forming an LLC is personal liability protection. However, without a formal operating agreement, a court may find that your LLC is not operating as a separate legal entity—especially in single-member LLCs. This opens the door to “piercing the corporate veil”, which can expose your personal assets to business liabilities.
An operating agreement demonstrates that your LLC is legitimate and organized, reinforcing your liability shield.
Customizes Default Texas Law
Texas has default rules that apply to LLCs without an operating agreement. These one-size-fits-all rules may not align with your business goals. For example:
- Profits may be distributed equally, even if members invested unequal amounts
- All members may have equal voting power, regardless of their involvement
With an operating agreement, you can override these defaults and tailor the terms to fit your specific needs.
Helps with Banking and Financing
Many banks and lenders require an operating agreement to:
- Open a business bank account
- Apply for loans or lines of credit
- Show proof of management authority
Having this document on hand speeds up financial transactions and demonstrates that your LLC is professionally structured.
What Should Be Included in a Texas Operating Agreement?
While each agreement is unique, most should cover the following:
- Member names and ownership percentages
- Initial capital contributions
- Profit and loss distribution
- Voting rights and decision-making procedures
- Management structure and responsibilities
- Rules for meetings and record-keeping
- Process for admitting or removing members
- Succession planning and dissolution terms
At Capstone Legal Strategies, we draft operating agreements that are both comprehensive and easy to understand, helping business owners avoid costly legal complications down the road.
Who Needs an Operating Agreement?
While all LLCs benefit from an operating agreement, it’s especially important if:
- You have multiple members
- You are investing substantial capital
- You want to clearly divide responsibilities
- You are starting a family-owned business
- You want to protect personal liability in a single-member LLC
Even if you’re the only member, this document proves that you’re operating a legitimate business entity, not a sole proprietorship in disguise.
Top Mistakes to Avoid When Drafting an Operating Agreement
- Using a one-size-fits-all template
- Failing to address voting rights and decision-making
- Overlooking buyout and exit provisions
- Not updating the agreement as the business grows
- Leaving out succession planning
- Ignoring tax and financial considerations
- Not addressing dispute resolution
- Failing to formally adopt the agreement
Real World Scenario: How an Operating Agreement Prevented a Costly Dispute
The Situation:
Two friends, Sarah and Mark, started a Houston-based home renovation LLC. Sarah contributed more capital and took on most of the day-to-day operations, while Mark played more of a passive, investor-type role. At the time, they used an online template for their operating agreement and didn’t customize it to reflect their different roles and contributions.
The Problem:
After a year, the business started making real money—and with that came tension. Mark assumed they would split profits 50/50. Sarah believed she was entitled to a larger share due to her workload and financial risk. To make matters worse, the generic agreement they signed didn’t mention profit allocation, capital return, or define active vs. passive roles.
The Resolution:
Had they gone to court, it would’ve been a messy and expensive battle, with Texas default laws likely enforcing an equal split. Fortunately, they brought the issue to Capstone Legal Strategies before things escalated. We worked with them to draft a new, customized operating agreement that:
- Clearly defined their ownership percentages
- Allocated profits based on capital contributions and effort
- Outlined how future disputes would be handled
- Provided a clear exit path if either partner wanted out
The Result:
With everything in writing, Sarah and Mark restored trust and avoided a lawsuit. Their business is now thriving—with the structure and legal foundation to support growth.
Protect Your Business from the Start
Launching a business is exciting—but skipping legal formalities can expose you to unnecessary risk. A well-drafted operating agreement is a proactive step toward securing your company’s future, avoiding disputes, and preserving harmony among members.
At Capstone Legal Strategies, we help entrepreneurs in Houston and throughout Texas set their businesses up for success. Whether you’re starting a new LLC or updating an existing agreement, we’ll ensure your operating agreement reflects your goals and protects your interests. Contact us today to schedule a consultation.