Limited Liability Company Operating Agreement
A Texas limited liability company is organized by filing a certificate of formation with the Texas secretary of state. The secretary of state has a web site that contains a form for filing. Once you do that and get a tax ID number, you’re in business.
However, that’s only part of the organizational documents you will need to transact certain kinds of business. For instance, if you apply for a loan at a bank, your lender will want to see your company operating agreement. The loan officer will further want to make sure that the person signing on behalf of the company actually has the authority to do so. If you buy or sell real estate, the title company will want to see a copy of your operating agreement as well as the certificate of formation.
Consequently, when forming your LLC, your business lawyer should prepare: (1) the certificate of formation (2) an operating agreement and (3) an organizational consent. This article describes a typical operating agreement and the issues to be considered when drafting one.
LLC Operating Agreement Requirements
At a minimum, the operating agreement should:
- Identify the members and their respective degrees of ownership
- State whether the LLC is managed by the members or by managers, and if by managers, the names of each manager
- Describe capital accounts and the capital contribution of each member
- Describe how the LLC will deal with loans from members, additional capital contributions and deficit balances in capital accounts
- Describe how meetings will be called, notice given and a quorum determined
- Describe member voting rights and procedures
- Describe the powers, numbers and election of managers, if applicable
- Describe regular and special meetings of managers and their voting rights
- Described manager’s compensation, liability and indemnification issues
- Describe the duties and responsibilities of the tax matters partner
- Describe the duties and responsibilities of the officers
- Describe the company’s policy regarding allocations and distributions
- Describe how books and records, tax returns and bank accounts will be managed
- Describe how transfers of interest may, or may not, be made
- Outline a procedure for dissolution of the company
The operating agreement must be signed by every member to indicate that they have adopted the agreement and agree to be bound by it. It is also good practice to have your business lawyer prepare a written organizational consent indicating that the members have adopted an operating agreement and elected officers.
I urge all members to thoroughly read the agreement to be sure they agree as to how the company will be operated on a broad basis. I encourage questions and dialog to ensure member understanding of the agreement. We want to avoid any “I didn’t know I agreed to that” down the road.
While these are some suggestions for creating an operating agreement, there is no “one size fits all”. It may be for that reason that the secretary of state does not promulgate a form for operating agreements. In any event, a well drafted agreement, tailored specifically to your company can go a long way toward each member’s understanding of his own role and responsibilities as well as those of the other members.