A Company Agreement Allows You to Customize the LLC’s Governance & Management.
In part two of our five part series about Texas LLCs, we narrow our focus and discuss the importance of a company agreement. For as long as I have been practicing law, I have heard people say that they are hiring an attorney to “form an LLC.” The formation—filing paperwork with the Texas Secretary of State—is the easy part. What you’re really hiring an attorney for is drafting the LLC’s company agreement. This is the document that allows the LLC’s members to customize the LLC’s governance and management.
Company agreements are not required–the Texas Business Organizations Code (the “TBOC”) governs LLCs without a company agreement. However, the TBOC is comprised of a generic set of rules that may not thoroughly address the needs of your business. Company agreements, especially those drafted for LLCs with more than one member, are crucial.
There’s no doubt that a single Google search will result in several company agreement forms that anyone can use to create a company agreement. But those forms likely will not address the specific circumstances of your business. Every business relationship is different and based a unique set of factors that are best discussed with an attorney who has experience drafting these types of agreements.
Consider These Items When Developing a Company Agreement.
There are multiple elements of a limited liability company agreement. Here are some initial items to consider when you work with an attorney to form your LLC and draft a company agreement:
- What percentage of the LLC will each member own, and how much cash or property will each member contribute to the company upon formation?
- Following formation, if the LLC requires capital, will each member have an obligation to make future capital contributions, or will all future contributions be voluntary?
- Will members be permitted to loan funds to the LLC? If so, on what terms?
- What does management look like? Will the members handle day-to-day matters for the LLC, or will one or more managers handle this task?
- Will you appoint officers of the LLC? If so, what duties will they have?
- Are you concerned about members, managers or officers participating in business activities that compete with the LLC?
- Are there certain key matters or risks that you are worried about?
- How frequently will the members meet? How about the managers? Who can call a meeting?
- What frequency will the LLC provide members with financial statements? Will the company appoint a tax advisor and/or auditor?
- Is a budget required? At what frequency?
- What type of approval is required to amend the company agreement?
- If there is a dispute between the members or managers, what is the process for resolution (e.g., mediation, arbitration, trial), and where will the resolution process be held (e.g., Dallas County, Texas)?
In addition to these questions, you should discuss the specific circumstances of your business and risks surrounding transfers of membership interests and/or admitting new members. The death, disability or divorce of a member can create problems, but the company agreement can address these issues and provide solutions before the problem occurs.
In case you missed it, check out our first article in this series which provides some general information about Texas LLCs.
Disclaimer: This article is not a substitute for tax or legal advice. Every situation is different; you should not rely or act upon the contents of this article without seeking advice from your own attorney. Use and access to this article or any materials or information provided herein do not create an attorney-client relationship between you and Christine Stroud, PLLC d/b/a Fincher Stroud Law, PLLC (the “Firm”). By providing public access to this article, the Firm is not purporting to solicit or render legal or other professional advice or opinions on specific facts or matters, and the Firm is not creating or intending to solicit or create an attorney-client relationship between you and the Firm.