At Hendershot Cowart P.C., we've seen firsthand how a comprehensive operating agreement can be the difference between a thriving business partnership and a courtroom battle that destroys both relationships and bank accounts.
What Makes Texas LLCs So Attractive?
A limited liability company (LLC) combines the liability protection of a corporation with the operational flexibility of a partnership. Under the Texas Business Organizations Code, you can form an LLC for virtually any business purpose except banking, insurance, title companies, and certain other services.
The key advantage: LLCs shield your personal assets from business liabilities while allowing you to customize exactly how your business operates through an operating agreement.
This unique combination of protection and flexibility makes LLCs the preferred choice for Texas entrepreneurs who want to safeguard their personal assets while maintaining operational control over their business.
The Operating Agreement: Your LLC's Legal Foundation
In Texas, your operating agreement (also called a "Company Agreement") is the defining document that governs how your LLC operates. Unlike corporations, which must follow rigid state-imposed structures, LLC members can agree among themselves on virtually every aspect of business operations.
Here's what most business owners don't realize: Without a comprehensive operating agreement, your LLC defaults to basic state law provisions that often don't match your business needs or protect your interests.
Six Critical Areas Where Operating Agreements Prevent Litigation
1. Membership Rights and Voting Procedures
The Problem: Disputes over who can become a member, how decisions are made, and what voting rights each member holds.
The Solution: A detailed operating agreement specifies:
- Requirements for new members joining the LLC
- Voting thresholds for different types of decisions
- Conditions for maintaining membership status
2. Financial Rights, Obligations, and Distributions
The Problem: Arguments over profit sharing, required capital contributions, and when distributions must be made.
The Solution: Your operating agreement should detail:
- How profits and losses are allocated
- Required and voluntary capital contribution procedures
- Distribution policies and timing
- Consequences for failing to meet capital call obligations
3. Management Structure and Authority
The Problem: Conflicts over who has authority to make decisions, sign contracts, or commit the LLC to obligations.
The Solution: Clearly defined management provisions that specify:
- Whether the LLC is member-managed or manager-managed
- Specific powers that require member approval
- Day-to-day management authority
- Procedures for major business decisions
4. Fiduciary Duties and Conflicts of Interest
The Problem: Disagreements over whether actions constitute breaches of fiduciary duty or improper conflicts of interest.
The Solution: Texas law allows operating agreements to limit – and even eliminate – fiduciary duties. Well-drafted agreements can:
- Define specific fiduciary obligations
- Create safe harbors for certain business activities
- Establish procedures for handling conflicts of interest
5. Member Withdrawals and Involuntary Removals
The Problem: Disputes when members want to leave or need to be removed from the LLC.
The Solution: Comprehensive exit provisions should address:
- Buyout triggers, such as death, disability, retirement, breach of the operating agreement, or voluntary departure
- Valuation methods for departing members' interests
- Right of first refusal – requirements to offer the departing member's interest to remaining members before outside buyers
- Restrictions on transfers – limitations on selling membership interests to third parties
- Payment terms and timing
6. Dispute Resolution and Mediation
The Problem: Business disputes that escalate directly to expensive litigation, destroying relationships and draining company resources.
The Solution: Structured dispute resolution procedures that require:
- Mandatory "cooling off" periods for heated disagreements
- Step-by-step escalation from direct negotiation to mediation
- Binding arbitration clauses to settle unresolved disputes
- Confidentiality requirements to protect business reputation
Single-Member LLCs: Don't Assume You Don't Need an Operating Agreement
Even single-member LLCs benefit from operating agreements that:
- Demonstrate business formality for liability protection
- Address succession planning and estate issues
- Establish procedures for adding future members
Professional Drafting vs. Online Templates
The Template Trap: Generic online forms don't account for:
- Texas-specific legal requirements
- Complex business arrangements or multiple owners
- Industry-specific considerations
- Recent changes to the Texas Business Organizations Code
- Advanced tax planning opportunities
The Professional Advantage: Experienced Texas business attorneys understand:
- How Texas courts interpret operating agreement provisions
- Common dispute areas and how to avoid them
- Tax implications of different structural choices
- How to avoid operational ambiguity with detailed management procedures
- Compliance requirements for your business type
Take Action to Protect Your Texas LLC
Don't let a poorly drafted or missing operating agreement put your business at risk. The cost of professional legal drafting is minimal compared to the potential cost of business disputes, litigation, and lost opportunities.
At Hendershot Cowart P.C., we focus not only on business litigation but also on crafting comprehensive operating agreements that help you avoid litigation in the first place. Our experienced Texas business attorneys understand both the legal requirements and practical business considerations that make operating agreements effective.
Ready to protect your LLC? Contact our Houston business law firm to schedule a consultation. We'll review your current situation and help you build the legal foundation your business needs to thrive.