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Why Your LLC Needs an Operating Agreement

On Behalf of | Oct 30, 2018 | Business Entities

Setting up an LLC in Texas is a relatively simple task that requires very little information. To successfully form an LLC in Texas you only need to provide the name of the LLC, the registered agent’s name and address, identify the LLC’s members or managers, a statement of the LLC’s purpose, and identify the LLC’s organizer.

While an LLC can be formed so easily, think of all the information and rules applicable to your LLC that are have not yet been addressed. In setting up an LLC, it is not even necessary to disclose the ownership interests of the LLC’s owners! An operating agreement, while not required by law, will specify each member’s ownership interest in the LLC and establish a ruleset for the operation of your LLC. For example, an operating agreement can specify if and when additional capital contributions to the LLC may be required, the conditions under which transfers of ownership interests will be permitted, and how profits and losses will be allocated among the members. If you fail to adopt an operating agreement or your operating agreement is silent on a certain matter, the default rules under the Texas Business Organizations Code may apply. However, having to resort to the “one-size-fits-all” rules established by the Texas legislature is rarely optimal.

If you make the decision to form an LLC you should strongly consider having an operating agreement to eliminate as much ambiguity as possible. Furthermore, you should review your operating agreement at least annually to make sure it still suits the needs of your LLC.