Why Your Texas LLC Needs an Operating Agreement (and Why Templates Fail)

You filed the Certificate of Formation. The Texas Secretary of State stamped it. You got your EIN. You opened a bank account. You feel like you have an LLC.

You almost do. The piece you are missing, the piece that actually governs how the LLC works internally, is the operating agreement. (Texas calls it a “company agreement” in the statute, but everyone in practice calls it an operating agreement.) It is the single most important document in the life of your LLC, and most of the self-formed businesses I see have either skipped it entirely or pulled a template off the internet that is not worth the paper it is printed on.

Let me explain why that is a problem, and what a real one actually does.

Texas Business Organizations Code § 101.052 governs LLC company agreements. The statute does not require you to have a written one. Texas will recognize an oral agreement, and if you have nothing in writing the LLC is governed by the default rules in the BOC.

This is the part most online formation services gloss over. The BOC defaults are default rules, not best practices. They were written to fill in the blanks for LLCs that did not bother to address the basics, and they are full of provisions you almost certainly do not want. Default voting thresholds. Default rules on transfers of membership interests. Default rules on what happens when a member dies, becomes incapacitated, gets divorced, or wants out. Default rules on distributions, on bringing in new members, on what triggers a buyout.

If you do not write your own rules, you have inherited the state’s. And the state’s rules were not drafted with your particular business in mind. They might be OK for your situation. Or they might be completely awful.

Three reasons, and they all have real money attached.

To control what happens when something goes wrong between members. Most multi-member LLCs eventually have a disagreement. Sometimes the disagreement is mild and fixable, and sometimes it is the kind that ends a friendship, a marriage, or a business. Without a company agreement that says how disputes get resolved, who has the authority to make which decisions, what happens if the members deadlock, how a member can exit and at what price, what happens if a member wants to sell to an outsider, you are looking at a courtroom. With a well-drafted agreement, you are looking at a process. The cost difference between “process” and “courtroom” is often six figures.

To preserve your limited liability. This is the reason most often invoked, and it is real. A signed company agreement is one of the things courts look at when deciding whether to “pierce the corporate veil” and hold members personally liable for company debts. The presence of formal governance documents (a company agreement, properly maintained books, observed formalities) is evidence that you are running a real entity rather than using the LLC as a personal piggy bank. The absence of those things is evidence the other way. (I have written separately about how a careless signature can, in combination with other things, pierce the veil and create personal liability for an LLC manager, and the analysis there is closely related.)

To get the tax treatment you actually want. A single-member LLC defaults to disregarded-entity status for federal tax purposes, and a multi-member LLC defaults to partnership taxation. You can elect different treatment, most commonly an S-corporation election, and your company agreement should reflect that choice and contain provisions consistent with the tax structure you have chosen. A company agreement drafted without thinking about tax can box you into a less efficient structure, or worse, contain provisions that disqualify your S-corp election entirely.

A real Texas company agreement covers, at minimum: how the LLC is managed (member-managed or manager-managed), who the members are and what their initial contributions are, how profits and losses are allocated, when and how distributions are made, what voting thresholds apply to which decisions, what happens when a member wants to transfer their interest, what triggers a buyout (death, disability, divorce, voluntary exit, expulsion), how the LLC can be dissolved, and how disputes are resolved.

I will stop there because the minute I start telling you what the actual terms should be, I am giving legal advice. Not to mention — what those terms should be depends entirely on your business, your partners, your industry, and your goals. A husband-and-wife real estate holding LLC has very different needs than a three-partner consulting firm. A startup planning to take outside investment needs provisions a bootstrapped business does not. A series LLC has structural issues a traditional LLC does not.

Which brings me to templates.

I understand the appeal of a $35 template. You see a document that looks comprehensive, you fill in the blanks, you sign it, you put it in a folder. Done.

Except the template was almost certainly drafted to be the broadest possible document that could be sold to the broadest possible audience. That is the opposite of what you actually need. Three specific failure modes I see constantly:

• Generic provisions that do not fit your business. The template assumes a “typical” management structure, “typical” voting rights (if they even exist), “typical” buy-sell triggers (if they even exist). Your business is not typical, because no business is. The provisions that look fine on paper might just turn out to give you completely the wrong outcome the moment a real situation arises. (One that I see all the time: the template says all major decisions require unanimous consent, which sounds protective until one of the three owners refuses to agree to anything and the company is paralyzed for a year.)
• Provisions that violate the BOC. Texas law contains certain restrictions that cannot be waived (§ 101.054 lists them), and I have seen multiple templates with provisions that conflict with these mandatory rules. A court that finds those provisions unenforceable may strike them, may strike adjacent provisions, or in extreme cases may invalidate the agreement. You think you have a binding company agreement; you might not.
• Missing provisions. A good template will have a section on dispute resolution. A bad one will not. A good template will have a clear buy-sell mechanism with a valuation methodology. A bad one will say “the parties shall agree on a fair price.” (They will not agree. On anything.) A good template will address what happens if a member dies. A bad one will leave it to the BOC defaults, and the heirs of your dead partner will become your new partners, whether you wanted them or not. And let’s not even get started with divorce — those LLC interests are community property. Guess who is now in business with a pissed-off ex-spouse?

The lawyer’s edge here is not that we have access to better templates. It is that we know what the template is missing, what parts of it can be modified for your situation, and what parts need to remain immovable. A good business lawyer can drive you anywhere you want to go (legally), even if the destination is well off the standard map. A template can only get you to the places it was designed to go.

If you have a single-member LLC for a side business and your “operating agreement” is a download you signed three years ago and never looked at again, you are probably fine until the day you are not. If you have a multi-member LLC and you skipped this document, you are betting the business on the assumption that nothing will ever go wrong between you and your partners.

If you would like to talk through what your operating agreement should actually look like for your business, reach out. It is one of the cheapest pieces of insurance you will ever buy against a problem that, if it shows up, can cost you the company.