Limited liability companies (LLCs) are a popular choice of business entity because they are relatively easy to establish. However, the simplicity of forming an LLC can cause some business owners to overlook some essential components.
A written operating agreement establishes a binding contract between all members of an LLC. Texas law only requires you to file a certificate of formation with the Texas Secretary of State. You are not required to file a written operating agreement. However, it’s highly recommended that you do so. If you don’t establish a written operating agreement, you run the risk of developing potentially serious legal headaches down the line.
Things to include in an operating agreement
A written operating agreement helps define the structure of a business. It can also chart a course for the direction a company is likely to take. Other components of an operating agreement include:
- Defining the roles of owners: If you are starting a business with more than one person, do you all have an equitable say in business-related decisions? How will you resolve disputes? It’s important to define the rights and responsibilities of owners from the outset.
- Financial concerns: You will want to determine how to allocate both profits and losses between all owners of the LLC.
- A process for ending the business venture: Most businesses will not last forever. You may not start a company with an end date in mind. However, establishing a business dissolution process, just in case, can help avoid legal stress if things don’t work out.
If you formed an LLC without filing a written operating agreement, you don’t have to despair. You can craft an operating agreement at any time. Of course, it’s always best to do so sooner rather than later. This will provide you with a stronger sense of direction and help you to head off potential legal disputes. You should discuss all of your business formation needs with a skilled legal professional.