An operating agreement is a contract signed by LLC members—and sometimes LLC managers—to provide for the governance and internal management of the LLC. The operating agreement defines the rights and obligations of the members and managers and serves as a blueprint for running the LLC.
The operating agreement is a critical LLC document. It governs important matters like management of the LLC, distribution of profits, contributions of members, agency of the members, tax allocations, addition of new members, withdrawal of existing members, and duties of the members and managers to each other and to the LLC.
The Texas Limited Liability Company Law uses the term company agreement to refer to the document that other states call an operating agreement.1 The terms company agreement and operating agreement are synonyms.
Role of the Company Agreement in Texas LLC Formation
Texas law recognizes two governing documents for LLCs:
- Certificate of Formation. The certificate of formation is a three-page document filed with the Texas Secretary of State to begin the LLC’s existence. It governs external matters, like the name of the LLC and the designation of the registered agent.
- Company Agreement. The company agreement is a private document that governs the relationships between the members and managers of the LLC, the transfer of membership, the governance of the LLC, and other important matters.2
An LLC is properly formed when both governing documents are in place.
Relationship of Company Agreement to Texas Limited Liability Company Law
Texas law is clear that it is the company agreement—and not the provisions of the Texas LLC law itself—that is intended to govern the operation of the LLC. Section 101.052(a) of the Texas Business Organizations Code provides:
“The company agreement of a limited liability company governs: (1) the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and (2) other internal affairs of the company.”3
The provisions of the Texas Limited Liability Company Law are default provisions. These provisions only apply “to the extent that the company agreement … does not otherwise provide.”4 If the LLC is properly formed and structured, the company agreement is the governing law of the LLC. The Texas Limited Liability Company Law is a backstop for LLCs that fail to plan properly.
Non-Waivable Provisions of the Texas Limited Liability Company Law
While Texas law defers to the company agreement in most cases, there are a handful of situations in which the company agreement cannot override the Texas Limited Liability Company law. A Texas company agreement may not:
- Waive or modify the requirement of Tex. Bus. Orgs. Code Ann. § 101.101 that the LLC have one or more members;
- Waive or modify the requirement of Tex. Bus. Orgs. Code Ann. § 101.151 that a promise to make a capital contribution or otherwise pay cash or transfer property to the LLC must be in writing;
- Waive or modify the prohibition in Tex. Bus. Orgs. Code Ann. § 101.206 against making distributions if, immediately after making the distribution, the LLC’s total liabilities exceed the fair market value of the LLC’s total assets;
- Waive or modify the requirement of Tex. Bus. Orgs. Code Ann. § 101.501 that the LLC keep books and records at its principal office and make them available if requested;
- Waive or modify the provisions of Tex. Bus. Orgs. Code Ann. § 101.602(b) regarding certain records, statements, and notices that apply to series of Texas series LLCs;
- Waive or modify the provisions of Tex. Bus. Orgs. Code Ann. § 101.613 regarding distributions with respect to a series of a Texas series LLC;
- Waive or modify the provisions of Chapter 1 (Definitions and Other General Provisions);
- Waive or modify the provisions of Chapter 2 (Purposes and Powers of Domestic Entity)
- Waive or modify the provisions of Chapter 3 (Formation and Governance), except that Subchapters C (Governing Persons and Officers) and E (Certificates Representing Ownership Interests) may be waived or modified in the company agreement;
- Waive or modify the provisions of Chapter 4 (Filing);
- Waive or modify the provisions of Chapter 5 (Names of Entities; Registered Agents and Registered Offices);
- Waive or modify the provisions of Chapter 10 (Mergers, Interest Exchanges, Conversions, and Sales of Assets);
- Waive or modify the provisions of Chapter 11 (Winding Up and Termination); or
- Waive or modify the provisions of Chapter 12 (Administrative Powers).5
These exceptions are called non-waivable provisions because the Texas company agreement cannot eliminate them. The non-waivable provisions do not apply to provisions of the Texas Limited Liability Company law that, by their own terms, allow the provision to be modified in the LLC’s governing documents.6 They also do not apply if the company agreement modifies a provision that specifies either the person or group of persons entitled to approve the modification or the vote or other method by which modification is required to be approved.7
- Tex. Bus. Orgs. Code Ann. § 101.101(a)(1).
- Tex. Bus. Orgs. Code Ann. § 1.002(36). See also Tex. Bus. Orgs. Code Ann. § 101.052, providing that the company agreement is the second company document governing the internal affairs of the LLC.
- Tex. Bus. Orgs. Code Ann. § 101.052(a).
- Tex. Bus. Orgs. Code Ann. § 101.052(b).
- Tex. Bus. Orgs. Code Ann. § 101.054(a) and (b).
- Tex. Bus. Orgs. Code Ann. § 101.054(b).
- Tex. Bus. Orgs. Code Ann. § 101.054(c).