LLC Documents in Texas

Clients often inquire as to the specific content of documents used in the formation of a Texas limited liability company. Core documents are (1) the Certificate of Formation; (2) the Company Agreement; and (2) the Minutes of the First Meeting of Members, also referred to as the organizational meeting. Documents for ongoing LLC operations include annual and special meetings and company resolutions.

There are no universally accepted "standard forms" - regardless of what internet services may say or imply in the promotion of their highly simplistic documents. Use of an internet service to form an LLC should not be considered by any serious investor or business person. If it is worth setting up an LLC in the first place, then it should be done with maximum effectiveness relative to the company's purpose and the desire of its members for asset protection.

Although the following summary reflects the basic format of these documents as prepared by this law office, the final versions (usually 20 to 30 pages long) are highly customized to suit the needs and circumstances of the client.

This article focuses on the documents necessary to form a Texas series LLC, which contains separate "series" or compartments for different assets and liabilities. The series LLC is now the preferred vehicle for real estate investment in Texas. It is suggested that this article be read in conjunction with LLC Formation in Texas, which can be found at www.LoneStarLandLaw.com. Our companion site, www.TexasSeriesLLC.com, specializes in forming series LLC's and related asset protection entities.

The Certificate of Formation supplies the essential information required by the Business Organizations Code ("BOC") and the Secretary of State in order to establish a Texas LLC. It may also contain such additional information concerning the business and operations of the company as the initial members may wish to make public. It is suggested, however, that for anonymity and asset protection purposes, it should include no more information than is required. The Certificate must be accompanied by the filing fee. Paying the extra fee for special handling is recommended.

Every company must have a registered agent. This person's name and physical address is specified. This is the person who will receive official correspondence from the Secretary of State, the Comptroller, and from attorneys giving notices and making demands. It is also the person who is served by the constable if the company is sued. This office is available to act as registered agent for an annual fee of $250.

This issue of company management is addressed in the Certificate. Either the company will be managed by its members or by elected managers. If the latter, then the name or names of these managers along with their addresses are supplied.

The company's period of duration and purpose are stated. This office has definite preferences in the wording of this section.

If the company is to be a series LLC then the BOC requires that the Certificate of Formation contain a notice of limitation on series liability.

Finally, the name and signature of the organizer appears. The organizer must be an authorized officer of the company. An attorney may sign as organizer provided the Minutes of the First Meeting ratify his actions as an authorized officer.

In total, three names must be given on the Certificate of Formation. For maximum anonymity, it is possible for the attorney to agree to act in all three capacities and then, afterward, privately assignment the entire membership interest to the client. Fees increase substantially for this service.

The Company Agreement governs the internal operation of the company as it is organized under Titles 1 and 3 of the BOC. It should be designed to maximize asset protection and will be one of the first documents requested to be produced if the company is sued, since it not recorded with the Secretary of State.

It should be prefaced with a disclosure as to the company's status under the Securities Act and notice that membership interests are subject to restrictions on sale and transfer.

Company Agreements should be customized to fit the client's circumstances. However, our agreements are drafted along the following general lines:

Examples of definitions given in this section are:

"Governing Documents" means the Certificate of Formation filed for the Company under Chapter 3 of the BOC and other documents or agreements adopted by the Company to govern the formation or the internal affairs and operation of the Company.

"Member" means a Person owning a Membership Interest in the Company and who has been admitted as a member of the Company in its Certificate of Formation, as well as any Member who may be later be admitted to the Company pursuant to this Company Agreement.

Percentage Interest" means a percent ownership in the Company entitling the holder to an economic and voting interest in the Company.

"Membership Interest" means a Member's ownership interest, whether expressed in units or as a percentage interest, specifically including a Member's share of profits and losses or similar items and the right to receive distributions.

"Managing Member" is any Member that may be designated as having operational authority over the day-to-day affairs of the Company. The Company may have co-Managing Members.

"Series LLC" is defined.

"Affiliate" means a person who controls, is controlled by, or is under common control with another person. Specifically hereunder, it includes any individual, partnership, corporation, limited liability company, trust, or other entity or association (whether directly or indirectly or through one or more intermediaries) controlling a Member, controlled by a Member, or under common control with a Member.

Many other definitions are included. Defining terms is an established legal technique for reducing conflict among participants in a contract.

This section approves such matters as the company Certificate of Formation, the company name, the registered agent, and recites a purpose clause. Powers are declared to be those enumerated in the BOC as well as others that are specifically listed. This section also establishes the company as a Texas Series LLC and contains provisions pertaining to the creation and labeling of series, the titling of series assets, and the powers of individual series.

The initial members, their capital contributions, and respective percentage interests are recognized in this section. It is stated that a member's percentage interest reflects the right of that member to vote in company affairs. Members may be associated only with a specific series.

It is provided that no interest will be paid on any capital contribution (note that a loan by a member is not considered as a capital contribution). Additional provisions govern the adjustment of percentage interests as new members are added. Our company agreement provides that additional members may be added (a) only upon unanimous vote of the existing members; and (b) upon payment of such consideration as a majority of the existing members shall specify. Admission of additional members requires a pro rata adjustment in the percentage interests of all members. New members must consent in writing to be bound by the company agreement and abide by company obligations.

It is usually provided that no member may demand the return of that member's initial contribution except upon the dissolution of the company. Allowing return of contributions upon demand could destroy a new company.

The company may make distributions of cash and property to members pro rata as agreed upon by vote of two thirds of the members.

Article III also establishes two classes of membership - "regular" members (Class A) and Class B members, who are defined to be any persons who acquire membership in the company by means of a court judgment, execution upon a judgment, assignment of a membership interest in satisfaction of a debt, or divorce. Class B members have very few rights in the company - basically the right to receive notices and be present at meetings. They cannot vote. This office divides membership in this way so that members of the company do not wind up in a disastrous "partnership" with other members' creditors and ex-spouses, since these persons are usually seeking to dissolve the company or sell off assets for cash.

Additional provisions recite that no member is individually liable under a judgment, decree or order of the court, or in other manner, for a debt, obligation or liability of the company, except as that member may expressly consent in writing or as provided by law. Also, unless expressly provided in the governing documents or approved by unanimous vote of the members, no member, acting alone, has any authority to act for, or to undertake or assume, any obligation, debt, duty or responsibility which has the effect of binding the company.

Management of the company, including voting power, is vested in the members in proportion to their percentage interests. A quorum is required for any legitimate meeting of members and consists of a majority of membership interests present in person or by written proxy. Most decisions are made by majority vote, but "Major Decisions" (eg., the sale or encumbrance of Company assets) require consent of members holding at least a two-thirds membership interest. Some decisions, including those involving dividend distributions, require a unanimous vote of members. It is vital that a clear division be made between decisions that require a simple majority, a super-majority (two-thirds), and unanimous approval.

The members may by majority vote elect one or more managing members for purposes of managing the day-to-day operational affairs of the company. In addition to selecting a managing member, or in the alternative, the members may elect and employ officers, including but not limited to a Chairman, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President, one or more Vice-Presidents, Secretary, and/or Treasurer of the company, together with their respective deputies and assistants.

It is provided that the members shall hold an annual meeting and may from time to time hold special meetings. Special meetings may be called by members representing in the aggregate more than 50% of the percentage interests in the company upon no less than 10 days notice to the other members. Action may be taken without a meeting if the required number of members consent in writing.

Members may pay compensation as determined by unanimous vote of all members for services provided in connection with the management of the company. Each member is entitled to reimbursement from the company of all expenses of the company, including organizational expenses.

An important provision relating to the management of a Texas Series LLC is included, since individual series may be managed separately by different managers.

Standards of performance for managers and provisions for their removal are also addressed.

The books and records of the company must be kept in accordance with the accounting methods approved by the members for federal and state tax purposes. The fiscal year of the company is usually agreed to be the calendar year. Books and records must be maintained at the principal place of business, and members have the right to inspect them at no charge and at reasonable times. Records for individual series must be kept separately. The power to make accounting decisions is addressed.

The net income, net loss or capital gains of the company for each fiscal year are allocated to the members pro rata in accordance with their percentage interests. The members may, by unanimous vote, make dividend distributions of any available cash or property held by the company, so long as such distributions are financially prudent. Distributions by a single series is considered.

This firm's company agreement includes the following: "No Member may assign, convey, sell, encumber or in any way alienate all or any part of that Member's Membership Interest without the prior written unanimous consent of all the other Members, which consent may be given or withheld, conditioned or delayed, as the remaining Members may determine in their sole discretion, without any requirement that such consent not be unreasonably withheld." Including a provision of this kind is critical to the successful operation of a small company. Basically, each member has a right of first refusal to purchase the interest of every other member. If there are multiple members, then the membership interest to be sold will be divided pro rata among members choosing to exercise this right.

Certain "Dissolution Events" (eg., death or insolvency of a member) are stipulated to have the effect of dissolving the Company unless the remaining members unanimously consent to the continuation of the business of the Company. If there is a dissolution event, the company has the first option (but not the obligation) to purchase the membership interest of the former member at net market value.

The members agree to mediate unresolved disputes prior to resorting to litigation or the filing of a complaint with any government agency. If suit or a complaint is filed without having first submitted the dispute to mediation, the parties agree that proceedings will be put on hold pending completion of mediation. See our companion article Mediation in Texas.

The article provides that the company will be dissolved when:

This section indemnifies any member who is sued in a company capacity. The company will pay for or reimburse the reasonable legal fees and expenses. Indemnification is available only if the member's conduct was not wrongful or in violation of the company agreement. The subject of company-purchased E&O insurance is addressed.

This section contains common legal recitals such as "This Company Agreement together with the other Governing Documents represent the entire agreement of the parties" and "The Governing Documents are governed by, interpreted, and enforced in accordance with the laws of the State of Texas." There are many others, and they are all important, even if they are considered "boilerplate."

Signatures of all members should appear at the end of the company agreement.

This concludes our comments on the content of the company agreement.

In order to maintain the viability of the company as a separate legal entity that provides a liability barrier for its members, certain things must be done to establish and prove its independence. The company should of course be properly established to begin with; this means that not only should all the initial documentation be in order, but that membership certificates should be issued, a taxpayer identification number obtained, and a bank account opened.

The company should have at least one formal meeting per year - formal in the sense that it is reduced to writing and included in the company record book. The basic elements of the annual meeting are review and ratification of the preceding year's actions by the company, its managing member(s), and officers (if any); recognition of any unusual events or circumstances not in the company's ordinary course of business; and election of new manager(s) and officers.

It is advisable to hold special meetings to approve any "major decision" as defined in the company agreement; approve the purchase or sale of real property; approve a loan to the company; or accept new members and realign the members' respective percentage interests.

Care should be taken to give proper notice of all meetings pursuant to the requirements of the company agreement or, in the alternative, all members should sign a waiver of notice at the meeting. The minutes should also be signed. There should never be an issue as to whether or not any member contests the validity of notice or approves the content of the minutes.

Company resolutions may also be requested by lenders or title companies as part of their due diligence in making a loan to the company or issuing title insurance on property sold or purchased by the company.

The first meeting of members, sometimes referred to as the organizational meeting, is not a recorded document. It is kept in the company minute book. Important elements of the meeting are:

The initial paragraphs of the Minutes recite the date and location of the meeting as well as the persons who are present. The attorney who drafted the Company's formation documents is often listed as present and being the one who prepares the Minutes.

This section acknowledges and approves the details of the Certificate of Formation and the various expenses incurred in forming the Company.

This portion of the Minutes recites that the Company is organized pursuant to Titles 1 and 3 of the Texas Business Organizations Code, commonly known as the "Texas Limited Liability Company Law." The general purpose of the Company, as stated in the Certificate of Formation, is to engage in "any and all lawful purposes for which a limited liability company may be organized under the Texas Business Organizations Code," but the Minutes may go on to state that the Company will focus its attention upon a particular business such as investing in real property.

The initial members, their respective initial contributions (whether in the form of capital or services rendered), and their respective percentage interests in the Company are included in this section. As stated in the Company Agreement (1) membership interests also reflect the right of members to vote in Company affairs; (2) additional members may be added (a) only upon unanimous vote of the existing members; and (b) upon payment of such consideration as a majority of the existing members shall specify. Adding members has the effect of reducing existing percentage interests pro rata.

The Company Agreement is reviewed and approved. It is optional as to whether or not certain key sections of the Company Agreement (eg., the right of first refusal of Members to buy each other's shares) is specifically recited.

A managing member or co-managing members are designated with the operational authority to manage the day-to-day operations of the Company. "Day-to-day operations" is a term more precisely defined in the Company Agreement.

The Company seal is affixed to the Minutes and approved.

The form and issuance of membership certificates is approved in this section. It should be noted that a complete set-up of the Company will include actual issuance of these certificates.

This section states that expenses incurred incident to forming and establishing the Company are approved and ratified. Reimbursement for Company organizational expenses is approved.

The registered agent and registered address are recited and approved.

These are recited and approved.

Provisions establishing the company as a series LLC are included.

This section addresses obtaining a taxpayer identification number and open an operating account on behalf of the Company. Check-writing authority may also be set out - ie., whether Company checks will require one or two signatures, although this is usually addressed in the Company Agreement as well.

If the company is a series LLC, this should be recognized in the Minutes.

The concluding paragraphs of the Minutes resolve that the Company shall commence business, waive notice of the meeting, state that the Minutes are approved, and are followed by the signatures of the Members attending.

The foregoing summarizes a basic organizational meeting. The company may also hold special meetings and should hold an annual meeting to review major developments, elect new managers, and ratify actions taken in the previous year.

The formation documents for a limited liability company in Texas contain certain common elements that should be addressed in the case of every new company. However, companies vary - their purposes and members are different. The formation documents should be drafted to reflect these differences. They should also provide protection from creditors and plaintiffs who are seeking to "pierce the corporate veil" and hold individual members liable for actions of the company. Ongoing annual and special meetings preserve the independent legal character of the company.

Consult an attorney knowledgeable in this area when forming an LLC. No serious business person should ever consider using forms or templates available off the internet or from some other such source.