Texas is one of the most business-friendly states in the United States, and its LLC laws reflect that orientation. The Texas Business Organizations Code (TBOC), Title 3, Chapter 101, governs limited liability companies formed in Texas and provides a flexible framework that gives members considerable freedom to structure governance, profit allocation, and management as they see fit. Yet that flexibility is a double-edged sword: without a comprehensive written operating agreement, the TBOC's default rules will fill every gap — and those defaults may not align with what the members actually want.
Formation Under TBOC Chapter 101
A Texas LLC is formed by filing a Certificate of Formation (Form 205) with the Texas Secretary of State. The certificate must include the company's name (which must include "Limited Liability Company," "L.L.C.," or "LLC"), the street address of the registered agent in Texas, the name of the registered agent, and a statement indicating whether the company will be member-managed or manager-managed.
The filing fee is $300, and the Secretary of State generally processes filings within 2–3 business days. Texas does not require an operating agreement to be filed with the state, but TBOC §101.052 expressly permits members to enter into one, and the statute gives an operating agreement broad authority to modify or supplement the default rules of Chapter 101.
Why You Need an Operating Agreement Even Though It's Not Required
Texas does not legally require an LLC to have an operating agreement. However, operating without one is a serious mistake for any multi-member LLC, and even single-member LLCs benefit substantially from having one. Without an operating agreement, the following default TBOC rules apply — and they may surprise you:
- Profits and losses are allocated equally among members, regardless of ownership percentage or capital contributions (TBOC §101.201).
- Each member has equal voting rights on all matters, regardless of economic interest (TBOC §101.254).
- Any member may bind the company in a member-managed LLC (TBOC §101.254(a)).
- Transfer of a membership interest does not automatically transfer voting or governance rights — only economic rights transfer without member consent (TBOC §101.108).
- Dissolution can be triggered by a unanimous vote of members or upon the occurrence of events that the members never anticipated (TBOC §101.552).
A well-drafted operating agreement overrides these defaults and replaces them with provisions that actually reflect the members' intentions and business realities.
Member-Managed vs. Manager-Managed LLCs
Texas LLCs must elect at formation whether to be member-managed or manager-managed. In a member-managed LLC, all members have equal authority to manage the company's business and bind the company contractually. This structure is common for small LLCs with a handful of active owners who are all involved in daily operations.
In a manager-managed LLC, only designated managers have authority to act on behalf of the company. Members who are not also managers have limited governance rights — they vote on major structural decisions but do not have authority to enter contracts, hire employees, or conduct ordinary business. This structure is appropriate when the LLC has passive investors, when members want a clear separation between ownership and management, or when the company is large enough to require professional management.
The operating agreement should clearly define: what decisions require member approval vs. manager discretion, the threshold for "major decisions" (often defined to include asset sales above a dollar threshold, new debt, admission of new members, and amendments to the operating agreement), and the process for removing or replacing a manager.
Profit, Loss, and Distribution Provisions
One of the most important functions of a Texas LLC operating agreement is defining how profits and losses are allocated and when distributions are made. The default equal-allocation rule almost never reflects the members' actual economic deal. Common allocation structures include:
- Pro-rata by membership interest: The most common approach — profits, losses, and distributions are allocated in proportion to each member's percentage interest.
- Preferred returns: Some members (typically investors) receive a preferred return on their capital contributions before general allocations are made. This is common in real estate and private equity LLCs.
- Carried interest / promote: A managing member or "promoter" receives a disproportionate share of profits above a hurdle rate as compensation for managing the business. Commonly used in real estate and investment fund structures.
- Tax distributions: In a pass-through entity, members incur personal tax liability on LLC income even if the LLC does not distribute cash. A tax distribution clause requires the LLC to distribute at least enough cash to cover each member's estimated tax liability — typically calculated at an assumed combined federal and state rate.
Texas Series LLCs: A Unique Structural Option
Texas is one of a small number of states that authorize "series LLCs" — a single LLC that contains multiple internally protected "series," each of which can hold separate assets, have separate members, and maintain separate liability protection. TBOC §101.601 et seq. governs series LLCs.
The primary advantage is asset segregation: if one series incurs a liability, the assets of other series are protected, provided that (1) the records of each series are maintained separately, (2) the assets of each series are held and accounted for separately, and (3) the Certificate of Formation includes a notice of the series limitation of liability.
Texas series LLCs are particularly popular for real estate investors who hold multiple properties. Instead of forming a separate LLC for each property (and paying a separate filing fee), an investor can create a single series LLC and add a new series for each property. The Texas Secretary of State does not charge an additional filing fee for each series (only the initial $300 for the master LLC), making this an extremely cost-effective structure.
Voting Rights and Governance Thresholds
A well-drafted operating agreement should specify the voting threshold required for different types of decisions. Common governance tiers include:
- Ordinary business decisions: Manager discretion (no member vote required).
- Major decisions: Majority of membership interests (defined as over 50% of all outstanding interests).
- Supermajority decisions: Typically 66.7% or 75% — used for admission of new members, incurring debt above a threshold, and changes to core business purpose.
- Unanimous decisions: Required for amendment of the operating agreement itself, dissolution, merger, and any changes to the fundamental economic deal between members.
Deadlock provisions are critical for two-member LLCs with equal ownership. Without a deadlock mechanism, a 50/50 disagreement can paralyze the company. Common solutions include a "shotgun" buyout clause (either member can offer to buy the other at a stated price, and the other member must either sell at that price or buy at the same price), appointment of a third-party arbitrator, or a pre-agreed tie-breaking manager.
Texas Franchise Tax (Margin Tax) Obligations
Texas does not impose a personal income tax, but it does impose a franchise tax — officially called the "margin tax" — on most LLCs with revenues over $2.47 million per year (the 2026 no-tax threshold, adjusted annually for inflation). LLCs below the threshold still owe a $0 "no tax due" return and the $50 annual Public Information Report.
The margin tax rate is 0.75% of "taxable margin" for most businesses (0.375% for qualifying wholesalers and retailers). Taxable margin is calculated as the lesser of: total revenue minus cost of goods sold, total revenue minus compensation, total revenue times 70%, or total revenue minus $1 million. LLCs must file the Texas franchise tax return (Form 05-158) with the Texas Comptroller annually by May 15.
Dissolution, Buyout, and Exit Provisions
Every operating agreement should address what happens when a member wants to exit — whether voluntarily, through death, disability, bankruptcy, or forced removal. Key provisions include:
- Right of first refusal: Before a member can sell their interest to a third party, the other members have a right to purchase the interest at the same price and on the same terms.
- Put/call options: Allows a member to compel the company or other members to buy their interest (put) or allows the company/majority members to compel a minority member to sell (call) upon defined triggering events.
- Buyout valuation: How will the price be determined? Book value, trailing EBITDA multiple, independent appraisal, or a formula agreed in advance?
- Non-compete on exit: Under Tex. Bus. & Com. Code §15.50, non-compete agreements are enforceable in Texas if ancillary to an otherwise enforceable agreement (such as an employment agreement or ownership agreement) and reasonably limited in time, geography, and scope.
Dissolution triggers under TBOC §101.552 include: a unanimous member vote, occurrence of events specified in the operating agreement, expiration of the LLC's specified duration (if limited), and judicial dissolution ordered by a court. A comprehensive operating agreement should list any company-specific dissolution triggers and specify a wind-down procedure that protects all members' interests.