The Role of a Written Company Agreement in a Texas LLC With One Member

By Hank FasthoffOctober 2, 2019

Texas calls an LLC operating agreement a company agreement. State law recognizes a written, oral, or implied company agreement, and Section 101.001 states that an agreement for an LLC with one member remains enforceable even though only one person is a party.

That rule answers the threshold question. One owner can enter into an enforceable company agreement with respect to the LLC. A written agreement then records the governance choices that would otherwise depend on the certificate of formation, company records, statutory defaults, or disputed evidence of an oral or implied understanding.

The agreement has defined limits. It doesn't create the LLC, replace the certificate of formation, guarantee limited liability, or transfer an ownership interest at death by itself. A written agreement coordinates the rules that govern the company and identifies authority for banks, contracting parties, investors, creditors, and successors.

Texas Recognizes an Agreement With One Member

The Business Organizations Code defines a company agreement broadly. A written agreement may consist of one or more writings. It may also incorporate schedules, supplements, and other records concerning the company's business and affairs. Texas therefore doesn't require an LLC with one member to sign a standalone written agreement or file one with the state.

The Texas secretary of state doesn't accept company agreements for filing, so the LLC keeps its agreement with its internal records. A certificate of formation and a company agreement serve different functions. One forms the entity and states public information such as whether the company initially uses managers. The other supplies the private governance terms.

An oral or implied agreement may satisfy the statutory definition, but proving its terms can be difficult. A written agreement identifies the operative terms, records the date of adoption, and provides third parties one document to review when authority becomes important. One signature accurately reflects the ownership structure.

The Agreement Changes Some Default Rules

Section 101.052 provides broad control over the internal affairs of an LLC and the relations among its members, managers, and the company. When the agreement remains silent, the statutory rules govern.

A company agreement can change many statutory defaults. Section 101.054 lists provisions that the agreement can't waive or modify, subject to the exceptions stated in the section. A complete agreement therefore distinguishes between rules the owner may change and rules the statute preserves.

For an LLC with one member, the agreement can address the owner's contribution, allocations and distributions, reimbursement, records, authority, indemnification, transfers, admission of another member, and events that begin a winding up. It can also state whether the company will continue after events that would otherwise affect its governance. Each provision has to remain consistent with the certificate of formation and the nonwaivable parts of the code.

Texas Statutes Provide the Liability Shield

Section 101.114 generally protects a member or manager from liability for an LLC debt, obligation, judgment, or court order. A company agreement can alter that statutory allocation only when it specifically provides otherwise.

Texas also applies Sections 21.223 through 21.226 to LLCs through Section 101.002. For contractual obligations, Section 21.223 rejects owner liability based only on alter ego, constructive fraud, a similar theory, or a failure to observe organizational formalities. The statute generally requires proof that the owner used the company to perpetrate actual fraud primarily for the owner's direct personal benefit.

Section 21.223 bars liability for a contract debt based only on skipped minutes or similar organizational practices. A written agreement also provides no automatic defense when the owner commits a tort, personally guarantees an obligation, assumes liability by agreement, misuses company property, or becomes liable under another statute.

Separate accounts, accurate books, contracts in the LLC's name, and records of contributions and distributions remain sound business practices. They identify who owns the money and property, support tax reporting, and reduce factual disputes. The company agreement can organize those practices without presenting them as a ritual that creates limited liability.

Management Terms Must Match the Formation Record

Section 101.251 recognizes management by members or managers. When the company agreement provides for management by one or more managers, the managers form the governing authority. When it provides for management by the members, the members form the governing authority. If the agreement says nothing, the certificate of formation determines whether managers or members govern.

The written agreement can state the sole member's authority and describe any authority delegated to a manager or officer. Useful provisions identify the decisions reserved to the member, limits on signing authority, compensation, reporting duties, removal rights, and the approval required for debt, asset sales, major contracts, or related party transactions.

A third party may request more than the internal terms. A bank, title company, landlord, or lender may ask for the certificate of formation, a certificate of status, a company agreement, or a written consent authorizing a specific transaction. Keeping those records consistent prevents the company from presenting one management structure publicly and another structure internally.

Succession Requires More Than Naming a Replacement

Death doesn't automatically place an heir in the former member's management position. Under Section 101.1115, a surviving spouse, heir, devisee, personal representative, or other successor receives assignee status to the extent of the transferred membership interest. Economic ownership and membership authority remain distinct until the successor becomes a member under the code and the company agreement.

Loss of the last member can require winding up. Current Section 11.056, amended in 2023, provides a continuation procedure for one year after the termination of the last member's continued membership or for the period stated in the company agreement. Within that period, the legal representative or successor can agree to continue the company and become a member, designate another person who agrees to become a member, or use a specific admission provision in the company agreement. The agreement may also obligate the representative or successor to continue the company and arrange the admission. If winding up begins, Section 101.552(c) provides the related procedure for canceling that event and continuing the company.

Death can end the last owner's continued membership and activate Section 11.056. Incapacity affects authority according to the agreement, agency documents, guardianship law, and the facts, rather than automatically ending the LLC.

A succession plan can name an interim manager, define incapacity, establish a method for determining it, and state who may exercise authority during the transition. The company agreement also has to align with the owner's will or trust, any assignment, the certificate of formation, and the admission procedure. Naming a successor in one document while transferring the interest differently in another can leave the estate with conflicting instructions.

Adding a Member Changes the Legal and Tax Structure

An LLC with one member may later admit an investor, employee, family member, or business partner. Section 101.103 generally requires the consent of all existing members for a person admitted after formation. With one member, the owner's written consent and the company records can establish the admission date.

The existing agreement supplies a useful starting point, but the addition requires more than changing the ownership table. The revised agreement has to address contributions, ownership interests, voting, distributions, information rights, transfer limits, duties, buyout terms, deadlock, and exit rights. Securities, tax, employment, and intellectual property issues may also arise from the grant.

Federal tax classification may change as well. The IRS generally treats a domestic LLC with one member as disregarded from its owner for federal income tax unless the LLC elects corporate treatment. An LLC with at least two members generally defaults to partnership treatment unless it elects corporate treatment. Editing the company agreement alone doesn't make or replace the federal election.

A Written Agreement Creates a Usable Governance Record

The strongest reason for a written company agreement is precision. It records who owns the company, who may act, how money enters and leaves, what happens when the owner can't act, and how another member may join. Those terms support daily operations and reduce the number of questions left for a statute, a probate court, or conflicting testimony.

The document also has to fit the LLC that exists. A form written for several members may introduce voting thresholds, deadlock procedures, and transfer provisions that make little sense for one owner. A short form that names only the owner may omit the authority, succession, and admission terms that justify having the agreement in writing.

For a Texas LLC with one member, the useful agreement coordinates the certificate of formation, ownership records, management authority, estate plan, contracts, and tax elections. The owner and the people dealing with the company then have a reliable record before anyone relies on it in a transaction or transition.