The Operating Agreement Is the Document That Actually Governs the Entity
A filing with the Secretary of State creates an LLC. The Operating Agreement decides how it actually runs, and most haven't been drafted for the job.
·6 min read·Last reviewed on April 23, 2026
The Certificate of Formation creates your LLC on paper. The Operating Agreement decides what the company actually does, who gets to decide it, and what happens when something goes wrong. Most owners have paid more attention to the document that doesn't govern their business than to the one that does, which is why the document that actually governs it is often a template they barely remember signing.
That's backwards. The filing with the Secretary of State is public-facing paperwork, cheap to produce and largely uniform across entities. The OA is the contract among the members (or the sole member, acting in two capacities) that sets the operating rules, the governance defaults, the triggers for transfer and buy-sell events, and the mechanism for resolving disputes. When the OA is silent or vague, Texas default rules fill the gap, and the default rules are rarely what a business owner would actually choose if they'd been asked.
Our working premise is that an operating agreement is a governance document first and a compliance artifact second. Drafted well, it's one of the most valuable assets the business owns. Drafted poorly, it's a liability waiting to be discovered the first time the business has to rely on it.
What the Certificate of Formation Does and Doesn't Do
The Certificate of Formation is a short public filing. It names the entity, designates a registered agent, states the entity's duration (usually perpetual), and indicates whether the LLC will be member-managed or manager-managed. That's close to all of it. The Certificate doesn't address capital contributions, profit and loss allocations, distribution policy, voting rights, transfer restrictions, buy-sell terms, or any of the governance questions that determine how the business actually functions.
Texas law expects the OA to do that work. The Texas Business Organizations Code permits members to set their own rules by agreement on almost every internal matter, and it supplies default rules only where the agreement is silent. Those defaults are narrower than most owners assume. Voting is per-capita rather than weighted by ownership (TBOC § 101.354), which surprises owners of LLCs where one member holds 90 percent and expects 90 percent of the vote. Distributions follow the agreed value of each member's contributions rather than a straight ownership-percentage split (§ 101.201). Fundamental transactions (mergers, conversions, sales of substantially all assets) require the approval of a majority of all members, not unanimous consent (§ 101.356(c)); the one place unanimity is the statutory default is amendments to the Certificate of Formation itself (§ 101.356(d)). For many businesses, these defaults are fine. For many others, they produce outcomes the owners would have drafted around if they'd known to.
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The relevant question isn't whether your LLC has an OA. It's whether the OA was drafted with your specific business in mind, or whether it was generated by a filing service that dropped your name into a template and pressed "print."
What a Real Operating Agreement Covers
Filing-mill OAs consistently fall short in the same handful of places, and not in equal proportions. Two of them cause most of the actual dollar losses we see; the others matter at the margins but rarely blow up a business by themselves. Ranking them matters because an owner reviewing an OA for the first time should know where to look first.
Transfer restrictions and buy-sell triggers do most of the work, and they're best thought of together. The two provisions address the same underlying question from different angles: who is allowed to hold a membership interest, and what happens when the current holder can't or won't keep it. Without clear transfer restrictions, a membership interest can be transferred, pledged, or inherited in ways the other members didn't expect and wouldn't have agreed to; without buy-sell triggers for death, disability, divorce, bankruptcy, or voluntary withdrawal, there's no mechanism (and no price, and no funding source) to resolve the situation once it happens. A well-drafted pair specifies who can transfer to whom under what conditions, carves out the exceptions owners actually want (transfer to a revocable trust of the same beneficial owner, transfer on death to a designated beneficiary, transfer to a family entity for estate-planning purposes), and sets the valuation and funding mechanism that takes effect when a triggering event occurs. In a multi-member LLC, the absence of a real buy-sell is how ownership fights happen: the death of one member leaves their interest with a spouse or estate the other members never agreed to partner with. In a sole-member LLC, these provisions are where the OA meets the estate plan, and where a misalignment surfaces first.
Deadlock resolution is the next tier down, and in any 50/50 or consent-requiring LLC it's almost as important as transfer restrictions. A deadlock provision specifies what happens when members can't agree: mediation, buy-out rights, a tie-breaking mechanism, or in the worst case, dissolution on defined terms. Without one, a genuine disagreement between equal members drops back to Texas default rules, which in practice means litigation or a court-supervised winding up, neither of which is what the members wanted when they went into business together.
Member-manager authority determines who can sign for the entity day to day. In a manager-managed LLC, the OA should specify which decisions the manager can make alone and which require member consent. The usual structure gives the manager ordinary-course operational authority and reserves extraordinary decisions (capital calls, borrowing above a threshold, admission of new members, sale of substantially all assets) to member vote. Filing-mill OAs either grant the manager unlimited authority (which makes every major decision a personal-liability question for the manager) or leave the line undefined, which is worse.
Indemnification scope decides whether the members and managers are covered when they're sued for doing their jobs. A well-drafted OA indemnifies members, managers, and officers for actions taken in good faith on behalf of the entity, to the fullest extent Texas law permits. Generic templates often indemnify only managers and leave members exposed, or use narrow indemnification language that doesn't reach the real scenarios where indemnification matters (third-party lawsuits, governmental investigations, disputes with former members). This is also where the OA has to speak to the D&O policy; the two documents should reach the same conclusion about what's covered.
Amendment procedures are last on the list because they matter less often, but they matter a lot when they matter. Every OA should specify how it can be amended. A well-drafted amendment provision calibrates the threshold to the stakes: majority for administrative changes, supermajority for economic changes, unanimous only for changes affecting specific members' rights. Defaulting to unanimous for everything sounds protective and works for a while, then becomes a bottleneck the first time the LLC needs to move quickly.
None of this is esoteric, and all of it gets settled the moment the OA is signed.
Why the Sole-Member OA Matters Too
A common assumption is that a sole-member LLC doesn't really need an operating agreement, because there's no one to agree with. The assumption is wrong. A sole-member OA does three things a Certificate of Formation alone cannot.
First, it reinforces the separation between the owner and the entity for liability purposes. Courts evaluating veil-piercing claims look for evidence that the LLC was treated as a genuine separate entity with real corporate formalities. An operating agreement is one of those formalities, and its absence is a factor courts can and do cite when finding that an LLC was a mere alter ego of its owner.
Second, it integrates with the estate plan. A sole-member OA that contemplates a revocable trust holding the interest, names a successor manager if the owner becomes incapacitated, and authorizes the trustee to act without additional consents is a meaningfully different document from one that doesn't address any of that.
Third, it creates governance clarity for the future, even when the present is simple. Sole-member LLCs often become multi-member LLCs when a spouse is added, a partner buys in, or an inheritance creates new members. Starting with a real operating agreement means the document already addresses those scenarios; starting without one means reconstructing governance under time pressure, which almost always produces worse terms.
The OA as an Asset
A well-drafted operating agreement isn't a document you put in a drawer. It's a reference the business comes back to whenever something changes: a new member joins, a buyer makes an offer, a member dies, a dispute surfaces, the company needs to borrow, the bank asks for governance documents, or the estate plan is updated. If the OA was drafted for those moments, it answers the questions. If it wasn't, someone is paying a lawyer to answer them under pressure.
The firm's view is that the OA is an asset of the business, and it should be treated like one: drafted with intention, reviewed periodically, amended when circumstances warrant, and coordinated with the estate plan and any related trusts or business agreements. Filing a Certificate of Formation doesn't accomplish that. A filing mill doesn't either.
If you own an LLC, or are about to form one, and haven't looked at your Operating Agreement recently, looking at it is the exercise worth doing. Our intake at /get-started asks about the current OA because it's usually the fastest way to see what's working and what isn't.
By Connor McGarvey · McGarvey Law · Dallas, Texas
This article provides general information about Texas law as of its publication date and does not constitute legal advice. Reading this article does not create an attorney-client relationship between you and McGarvey Law or any of its attorneys; such a relationship is formed only by a signed written engagement agreement. The attorneys of McGarvey Law are licensed to practice in Texas; the law of other jurisdictions may differ. Prior results do not guarantee a similar outcome.
Responsible Attorney: Connor McGarvey, Texas Bar No. 24126967
McGarvey Law is a law firm licensed to practice in the State of Texas. The information on this website is for general informational purposes only and does not constitute legal advice. Viewing this website or submitting an intake form does not create an attorney-client relationship. An attorney-client relationship is only formed upon the signing of a written engagement letter and payment of the agreed-upon fee.
Estate planning is not a recognized specialty area by the Texas Board of Legal Specialization. Results vary based on individual circumstances.
