Texas Limited Liability Company (LLC) Formation Documents

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Overview

Documenting a Texas LLC requires LLC members to think about numerous current and potential issues that may result during the lifetime of their business. Specifically, management, organizational, accounting, and taxation issues are common topics LLC members should consider.

Generally, if an LLC gets sued, a plaintiff’s attorney will generally request the LLC’s company book and relevant documentation during the discovery period. This request is specifically for the purpose of analyzing whether a plaintiff’s attorney can attempt to “pierce the corporate veil” of the LLC, and subsequently render the LLC members personally liable for the suit in question. In particular, company agreements tend to be scrutinized by plaintiff’s attorneys for the purpose of analyzing whether the agreement contains any particular provisions that may be a significant burden to recovery.

What Documents Should My LLC Have?

Quality over quantity is paramount for Texas LLC formation documents. The formation process should focus on asset protection and provisions that work to limit LLC members’ liability. Formation documents can range from as little as several pages to documents that range between 20 and 30 pages in length. However, the focus of these documents should be on proper transfer of membership interests, provisions to restrict the sale or transfer of membership interests, and division of membership interests into classes that limit the potential for judgment creditors and ex-spouses to exercise control and potentially liquidate the assets of an LLC. Typically, Texas LLC formation documents should include the following documents organized in a company book:

  1. a properly filed Certificate of Formation with the Texas Secretary of State;
  2. signed consent by the LLC’s registered agent;
  3. a company agreement that reflects the aforementioned issues;
  4. properly documented minutes of the first meeting of members;
  5. warranty deeds, bills of sale, and any other documentation that conveys assets into the LLC; and
  6. issued and signed membership certificates (if required in the company agreement).

Important Points to Consider in a Certificate of Formation

The Texas LLC’s Certificate of Formation basically functions as a document that conveys information required by the Texas Secretary of State and the Texas Business Organizations Code to officially form an LLC. However, Certificates of Formation can also include other pertinent operations information that the initial members of the LLC wish for the public to know. However, in the interest of anonymity and confidentiality, many LLCs wish to keep information on a Certificate of Formation to a minimum in furtherance of asset protection.

Additionally, if an LLC is formed for the purpose of being a series LLC, the Texas Business Organizations Code requires that the Certificate of Formation include a “notice of limitation on series liability.” This notice should be detailed specifically on the Certificate of Formation and should clearly state that each series functions independently and is not responsible for the liabilities or debts of any other series of the company at large.

One piece of information that all LLCs are required to list on a Certificate of Formation is the company’s Registered Agent. A Registered Agent’s name and physical (street) address must be specifically listed in the Certificate of Formation. Post Office Boxes do not suffice for Registered Agent addresses. Additionally, the Certificate of Formation must list initial members or managers of the LLC. Unlike Registered Agents, initial members or managers can list Post Office boxes, and are recommended in doing so to prevent disclosing home addresses. Finally, the Certificate of Formation must list the organizer, who is often an attorney that is an authorized representative of the company.

Key Provisions in a Texas LLC Company Agreement

In short, a Texas LLC company agreement governs the internal operations and affairs of the LLC. Goals should be focused on asset protection and preferably customized to fit the needs and particular circumstances of your business. However, most well-drafted LLC company agreements contain the following types of provisions:

Percentage Interest Voting - In general, most decisions should be made by a majority vote. However, major decisions affecting the LLC should generally require a unanimous or supermajority vote. Additionally, terms such as a “quorum” should be defined.

Differing Classes of Membership - Membership should be distinguished between “regular” members and those members who either gain influence or membership via an LLC member’s divorce proceedings, court judgment, assignment of membership interest to satisfy a debt, execution of a judgement, or charging order. The latter members should have very limited rights in the company; essentially, basic requirements such as the right to be present at meetings and receive notices from the LLC. Specifically, these latter members should not be allowed to vote. A well-drafted membership provision will ensure that remaining regular members are not forced to conduct business with a member’s ex-spouse or creditors. Generally, the latter group of members are looking for the most efficient way to either sell off the company’s assets for cash or dissolve the company completely.

Restrictions on Transfer or Sale of Membership Interest - In general, for the successful operation of a small Texas LLC, each member should have the right of first refusal to purchase the membership interest of every other member. This ensures that existing members have the opportunity to buy out a member who may leave, retire, or die. If there are opportunities in which multiple members may purchase another member’s interest, provisions should be added that allows the membership interest to be sold to multiple members pro rata.

Series LLC Provisions - If an LLC is designated as a series LLC, a company agreement should include detailed descriptions of the characteristics of the series including operations, management, membership, and voting rights.

LLC Dispute Resolution - While members forming an LLC hopefully do not anticipate the need for litigation amongst themselves, it is wise to include provisions that allow for members to mediate their unresolved disputes through the American Arbitration Association (AAA), JAMS, or another alternative dispute resolution (ADR) provider that the members can agree upon before resorting to litigation.

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