Everything You Need to Know About Operating Agreements

Legally Reviewed by Boyd Hoekel on July 30, 2026

An operating agreement is the internal rulebook for a limited liability company, setting out who owns what, who manages the business, and how profits, losses, and disputes get handled. Texas law does not require an LLC to have one, but operating without one leaves your company governed by default rules that rarely match what the owners actually intended.

At Quadros, Migl & Kilmer, we help Texas business owners draft, review, and update operating agreements that reflect how the company is actually meant to run. Our team of attorneys works with founders, family businesses, and investment groups to build agreements that hold up when circumstances change, not just when everyone is getting along.

What Is an Operating Agreement?

An operating agreement is a legal document that outlines the ownership and operating procedures of a limited liability company (LLC). It defines the structure of your business, details the roles and responsibilities of members, and establishes rules for decision-making and profit distribution.

Operating agreements typically define:

• Ownership Structure: Clarifying who owns what percentage of the company.
• Management: Specifies who will manage day-to-day operations and how decisions will be made.
• Profit Distribution: Outlines how profits and losses will be shared among members.
• Member Responsibilities: Details the duties and responsibilities of each member.
• Dispute Resolution: Provides methods for resolving conflicts between members.

An operating agreement serves as the foundational blueprint for how your LLC will function internally, ensuring all members are on the same page from the start.

What Happens If Your LLC Has No Operating Agreement?

Texas does not require an LLC to adopt an operating agreement, but skipping this step does not mean your company operates in a legal vacuum. Instead, the Texas Business Organizations Code fills the gap with default rules that apply automatically whenever the company’s governing documents are silent.

Those defaults were written to cover any LLC in the state, so they rarely reflect what a specific group of owners would choose for themselves. Depending on how the company is structured, the statutory defaults can dictate equal management rights regardless of ownership percentage, generic rules for admitting new members, and limited guidance for what happens when a member wants to exit or a dispute reaches a standstill. You can review the underlying framework in the Texas Business Organizations Code, Chapter 101, which governs limited liability companies.

For a single owner, the absence of a written agreement can also weaken the liability protection the LLC is supposed to provide, since courts evaluating a claim against the company may look to whether the business was actually run as a separate entity with its own governing rules. A written operating agreement is one of the clearest ways to demonstrate that separation.

Single-Member Versus Multi-Member Operating Agreements

Not every operating agreement needs to look the same, and the right approach depends heavily on how many owners the LLC has.

Single-Member LLCs

A single-member LLC has only one owner, so there is no other party to negotiate voting rights or profit splits with. Even so, a written operating agreement remains valuable. It reinforces that the business is a distinct legal entity separate from its owner, which supports the liability shield the LLC structure is meant to provide, and it gives banks, lenders, and title companies a document to rely on when the company opens accounts or closes transactions.

Multi-Member LLCs

When two or more owners are involved, the operating agreement becomes the primary tool for preventing disagreements from turning into disputes. It should address how much authority each member has, how ownership percentages translate into voting power, what happens if a member wants to sell their interest, and how the company breaks a deadlock when members cannot agree. Skipping these details does not make the underlying disagreements go away. It just means they surface later, usually at a worse time.

Key Provisions Every Operating Agreement Should Address

Beyond the basics of ownership and management, a well-drafted operating agreement should account for the scenarios that most commonly create friction between LLC members.

Capital Contributions and Additional Funding

The agreement should specify what each member contributed to form the company and how future funding needs will be handled, whether through additional capital calls, loans from members, or outside financing. Without clear rules, a member who is unwilling or unable to contribute more capital can create a standoff at exactly the moment the business needs cash.

Transfer Restrictions and Buy-Sell Provisions

Most owners do not want a member’s ownership interest to end up in the hands of a stranger, an ex-spouse, or an estate after a member dies, becomes disabled, or simply wants out. Transfer restrictions and buy-sell provisions set the rules for when and how an interest can change hands, and they often establish a valuation method in advance so members are not negotiating price under pressure.

Voting Rights and Decision-Making

Specify how decisions will be made and the voting process. Many agreements use a majority vote for routine matters but require unanimous or supermajority consent for significant changes, such as amending the operating agreement, admitting a new member, or dissolving the company.

Profit and Loss Distribution

Clearly state how profits and losses will be allocated among members. This section should align with ownership percentages unless the members intentionally decide on a different arrangement, such as when one member contributes more labor than capital.

Indemnification and Liability Protections

Well-drafted agreements typically include indemnification provisions that protect members and managers from personal liability for good-faith decisions made on the company’s behalf, along with limits on when a member can be held liable to the company itself.

Dispute Resolution Procedures

Disputes are inevitable in any business with more than one decision-maker. Including a clear process for resolving conflicts, such as mediation or arbitration, before litigation becomes the only option can save time, money, and working relationships.

Updating and Amending Your Operating Agreement

Your operating agreement should not be a static document. As your business grows and evolves, you may need to update or amend it to reflect changes in ownership, management, or operations.

Be sure to revisit your operating agreement when:

• Adding or removing members
• Changing the management structure
• Significantly changing the nature of the business
• Bringing in outside investment or financing

Include a process for amending the operating agreement within the document itself. This typically requires a vote of the members, with the specifics outlined in the initial agreement.

Common Mistakes Business Owners Make With Operating Agreements

Many of the disputes we see between LLC members trace back to a handful of avoidable mistakes made when the agreement was first drafted.

• Using a generic template: Downloaded templates rarely account for the specific ownership structure, industry, or funding plans of the business, leaving gaps that surface later.
• No deadlock mechanism: Agreements with an even split of ownership and no tiebreaker provision can leave a company unable to act when members disagree.
• Ignoring buy-sell provisions: Failing to address what happens when a member wants to leave, retire, or passes away can turn a routine transition into a contested legal matter.
• Failing to update after changes: An agreement that still reflects the company’s original three founders is not much help after two of them have sold their interests.

Reviewing your operating agreement periodically, particularly after any significant change in ownership or business direction, helps ensure it still matches how the company actually operates.

Frequently Asked Questions About Operating Agreements

Create or Amend Your Business’s Operating Agreement With an Experienced Attorney

At Quadros, Migl & Kilmer, we help you create, review, and update your operating agreement to ensure it meets your business’s unique needs. Our team’s diverse background, spanning large multinational firms to specialized practices, allows us to offer practical, client-focused guidance rather than a one-size-fits-all template.

Whether you are forming a new LLC or updating an agreement that no longer reflects how your company operates, our attorneys can help you build a document that holds up when it matters most. Reach out through our contact form to schedule a consultation.