An LLC operating agreement is the legal document used to form an LLC. This article explains what you need to know about creating one.
A Texas LLC operating agreement must include certain information about the formation of an LLC. These items are called articles of organization. Articles of organization are required because an LLC cannot exist unless it is formed under state law.
The most important item in an operating agreement is Article I. Article I contains basic information about the LLC including the name and address of the LLC. Other key points include the names and addresses of the initial members of the LLC and the date upon which the LLC began operations.
Article II requires each member of the LLC to file a written consent to become a member. In addition, each member must execute a personal guaranty for the debts of the LLC.
Members can buy out other members of the LLC without any problem. If a member wants to sell his interest in the LLC, he must notify the remaining members in writing. When a member sells his interest in the LLC to another person, the buyer becomes a member of the LLC.
If a member dies, resigns, or ceases to do business, the remaining members can elect to dissolve the LLC. Dissolution terminates the existence of the LLC.
In addition to requiring an LLC operating agreement, Texas also requires that an LLC operating agreement be filed with the Secretary of State. Failure to comply with this requirement could lead to fines or even criminal charges against the individual responsible for filing the documents.
Table of Contents
How to Create a Texas LLC
A Corporation vs. an LLC
An LLC is often confused with a corporation. While both are legal entities, there are some key differences between the two.
Corporations are required to file annual reports, pay corporate income tax, and follow certain rules set forth by the IRS. Corporations must also maintain separate books and records for each entity within the corporation.
LLCs do not require much maintenance. They don’t have to file reports, pay taxes, or adhere to any specific regulations. However, they still have to follow state laws and local ordinances.
There are several benefits to forming an LLC over a corporation. For instance, corporations are subject to double taxation, whereas LLC owners are taxed once on the profits earned by the LLC.
Texas requires that every LLC file an “Articles of Organization,” just like a corporation. This document includes information about the name of the LLC, the address where it is registered, the date the LLC was established, and the names of the members.
The process of incorporating an LLC in Texas is relatively straightforward. You’ll simply need to complete a few forms and mail them to the Secretary of State. Within 24 hours, you’ll receive an email confirming whether your application was accepted or rejected. If approved, you’ll receive another email containing the necessary documents.
Once incorporated, you can open a checking account for your LLC.
Writing a Business Operating Agreement
To write an operating agreement, you must first determine whether it is a single member entity or a multi-member limited liability company (LLC). A single member LLC requires no formalities beyond those required for incorporation. The members are listed in alphabetical order; however, the names of the members do not necessarily need to be entered in alphabetical order.
For a multi-member LLC, the process begins with the formation documents. These include articles of organization, minutes of organizational meeting, and operating agreements. Articles of organization provide information about the number of members, how many shares each member holds, what type of entity the LLC is, and where the LLC will conduct business. Minutes of organizational meeting provide information about the initial organizational meeting. Operating agreements describe how the members’ interests will be represented, how the LLC will operate, how decisions will be made, and how disputes will beresolved.
Texas LLC Annual Report
All businesses operating under the Texas limited liability company act must file annual public information reports with the comptroller’s office. This includes sole proprietorships, partnerships, corporations, general partners, limited partners, foreign entities doing business in Texas, and limited liability companies. These reports include financial statements, board meeting minutes, and copies of articles of organization and amendments.
Each company must file a franchise tax return every calendar year. Franchise taxes are calculated based on each entity’s net taxable income. Net taxable income is gross revenue less the total costs of goods sold.
Companies must file their annual report within 30 days following the end of the fiscal year.
The comptroller’s website provides instructions on filing and downloading documents.
Business Licenses and Permits
Consult with the municipality where your small business is located to find out what type of licenses or permits you might require. You can check with the city clerk or county recorder’s office to determine whether you need a permit or license. If you plan to sell products or services, ensure you know how much you must pay to renew your license each year.
If you want to form a limited liability company (LLC), you must file articles of organization with the secretary of state’s office. In most states, you must register your LLC within 30 days of forming it. Once registered, you must file annual reports with the secretary of state. These filings cost $100 per year.
Ensure you understand the rules governing your state’s Limited Liability Company (LLC) laws. For example, some states allow members to vote on matters such as changing the operating agreement, while others do not. Some states allow members to elect managers, while others don’t. And some states allow members to assign their interest in the LLC to another member, while others prohibit this practice.
Where Should My Operating Agreement Be Filed?
An operating agreement is not filed somewhere. You don’t file it with the state where you’re incorporated or with the IRS. Instead, it’s usually filed with the secretary of state’s office in the state where you do business.
Most banks will ask you to sign an operating agreement when opening a new business bank account, especially if you plan to use the account for business purposes. If you are planning to incorporate, most states require an operating agreement. Depending on the entity you form, some states require an operating agreement even if you aren’t incorporating.
If you are forming a corporation, you’ll probably need to file an operating agreement with the state where you formed the corporation. However, filing an operating agreement with the Secretary of State’s Office isn’t necessary if you are forming an S Corporation.
What Does It Cost?
The cost of forming a limited liability company (LLC), including filing fees and legal fees, depends on the type of entity you are creating. If you form a corporation, you pay $100-$500 per person. Using our free LLC formation service, you can avoid paying those fees entirely. For sole proprietorships, partnerships, or unincorporated businesses, the fee ranges from $50-$1,000.
If you want to ensure that your operating agreement is legally binding, you can always hire a business lawyer to draft one for you. In most states, you must file an operating agreement within 30 days of incorporation. Otherwise, it becomes void and unenforceable. This is why we recommend getting a professional to do it for you.
Is an Operating Agreement Required?
Writing an operating agreement makes sense when you are starting a business. You’ll run into trouble down the road if you don’t have one. But what exactly does it entail? And how do you know whether you need one? This article provides some insight.
Operating agreements define certain aspects of the relationship between partners involved in a venture. They typically include ownership, compensation, liability, confidentiality, intellectual property, and termination provisions. In addition, they often spell out procedures for resolving disputes. An operating agreement is usually drafted by lawyers and reviewed by legal counsel. You might think that having an operating agreement is just common sense. After all, wouldn’t you want to ensure everyone knows where he stands? Well, yes, but there are reasons why you shouldn’t skip writing one.
First, you never know when things could go wrong. Even though you’ve been running a business together for a while now, something unexpected could still happen. For example, you could find yourself in court over a dispute involving money or property. Or maybe someone gets injured on your premises. What happens next? Who pays for medical bills? How much is owed to whom? These questions and many others require clear documentation.
Second, even if everything goes smoothly, you may want to change the terms later. Maybe you decide to sell your interest in the business. Perhaps you want to hire another partner. Whatever the reason, you’ll probably want to revisit the contract and update it accordingly.
Third, an operating agreement protects both parties interests. If you’re working alone, you may not have anyone else to look out for. By drafting an operating agreement, you ensure that no matter what happens, you won’t lose anything.
Finally, having an operating agreement makes sense because it’s good practice. When you start a business, you should always keep your options open. So, write up an operating agreement, sign it, and put it somewhere safe. Then, when you need it, you’ll already have it.
Frequently Asked Questions
Who needs your Operating Agreement?
Texas law requires every corporation operating in the state to have an operating agreement. This document spells out how the company will operate, what each board member does, and how decisions are made. If you don’t have one, here are some things you want to know.
Every company must have an operating agreement. A good rule of thumb is that if you’re doing anything remotely related to money — like issuing loans or making investments — you probably need one. You might even consider having a separate operating agreement for your sole proprietorship.
An operating agreement’s main purpose is to ensure everyone knows their responsibilities within the organization. For example, the operating agreement explains how voting power works if you have an employee stock ownership plan.
You can either draft one yourself or hire someone to do it. Either way, you’ll need to file your operating agreement with the Secretary of State. They keep records of them online.
When should I create my operating agreement?
While it’s a good idea for entrepreneurs to create an operating agreement prior to forming an LLC, there are no rules about how soon you must do so. However, many states require you to file a Certificate of Formation within 30 days of creating the entity. If you’re looking to incorporate, the best thing to do is to start early — even if you don’t know what type of entity you want to form. You’ll save money by avoiding unnecessary fees and legal costs.
James Rourke is a business and legal writer. He has written extensively on subjects such as contract law, company law, and intellectual property. His work has been featured in publications such as The Times, The Guardian, and Forbes. When he’s not writing, James enjoys spending time with his family and playing golf.