A Company Agreement is the key governing document for a limited liability company (LLC), providing the framework from which it operates. Starting a new business? Here’s a quick overview of why it’s so important for you and 8 things to include.

Company Agreements are very similar to bylaws for corporations or partnership agreements for limited partnerships. According to the Texas Business Organizations Code (TBOC), the agreement “governs the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and other internal affairs of the company.”

The terms of your company’s agreements will depend on the needs of your business, the nature of the work involved, and what type of industry you are in, however the following elements may be included:

Ownership Structure

Who gets each piece of the pie and how big those pieces are.

First off, understand your legal options—whether it’s a sole proprietorship, partnership, LLC, or corporation. Each has its perks and pitfalls, so choose wisely based on your goals and risk tolerance. Once you’ve nailed that down, allocate ownership shares among partners or shareholders. Consider factors like investment, involvement, and future contributions.

Be crystal clear about each owner’s rights and responsibilities. This includes voting power, profit distributions, and decision-making authority. Don’t forget exit strategies—lay out procedures for buying out a partner or selling shares if someone wants to leave the company.

Keep your agreement flexible yet firm. Things change, so build in mechanisms for adjusting ownership percentages or admitting new partners. And remember, this isn’t a one-person job. Work closely with legal and financial advisors to ensure your structure aligns with your vision and protects your interests. With a solid ownership agreement in place, you’ll set a strong foundation for your business’s success.

Management

Who are the managing partners or those entrusted to manage the teams in your organization.

First things first, outline the roles and responsibilities of each manager, whether they’re partners or hired executives. Define decision-making processes and establish clear lines of authority to avoid confusion down the road. Consider factors like expertise, experience, and availability when assigning managerial tasks.

Be sure to address key operational areas such as finances, marketing, and day-to-day operations. Create protocols for resolving conflicts and making strategic decisions, ensuring everyone is on the same page.

For managing partners specifically, detail their rights and obligations, including profit-sharing arrangements, voting power, and limitations on individual actions. Set expectations for communication and collaboration to foster a cohesive leadership team.

Remember, flexibility is key. As your business grows, you may need to adjust roles and responsibilities accordingly. Regularly revisit and update your management structure to reflect the evolving needs of your company. And always seek guidance from mentors and advisors to navigate these complexities effectively.

Members’ Rights and Responsibilities

How each member serves the team.

Start by outlining each member’s rights, such as voting privileges, profit distributions, and access to company information. Ensure fairness and transparency in these allocations, considering factors like investment contributions and roles within the business.

Next, specify members’ responsibilities, detailing their duties, obligations, and expected level of involvement. This might include tasks related to management, operations, or strategic decision-making. Emphasize the importance of communication and collaboration among members to foster a positive and productive working environment.

Additionally, address potential conflicts of interest and mechanisms for resolving disputes amicably. By clearly defining rights and responsibilities upfront, you lay the groundwork for a cohesive and accountable team. Regularly review and update these provisions as your business evolves, ensuring alignment with the changing needs and goals of your venture. Remember, seeking guidance from mentors and legal advisors can provide invaluable support in this process.

Allocation of Profits and Losses

How much should each person take at the end of the year?

Allocate profits and losses by determining each member’s share based on their ownership percentage or as agreed upon in the company agreement. Consider factors like investment, effort, and risk undertaken by each member. Detail how profits will be distributed, whether through periodic distributions or reinvestment into the business. Address loss allocation, ensuring fairness and alignment with each member’s stake in the company. Regularly review and adjust these provisions to reflect changes in the business’s financial performance and ownership structure.

Distributions of Profits

How the company’s profits will be distributed.

Defining profit distribution in your company agreement is crucial for fairness and transparency. Start by outlining the criteria for distributing profits, such as percentage ownership or contribution to the business. Specify the timing and frequency of distributions, whether they’re monthly, quarterly, or annually. Consider reinvesting a portion of profits back into the business to fuel growth. Address any special circumstances or contingencies that may affect distributions, such as taxes or debt obligations. Lastly, emphasize the importance of open communication and flexibility, allowing for adjustments as the business evolves. By clearly defining profit distribution procedures, you establish trust and alignment among all stakeholders, setting a strong foundation for your business’s financial success.

Members’ Voting Power

Who gets a vote and how much weight that vote carries.

When defining members’ voting power in your company agreement, consider the principle of fairness and alignment with each member’s stake in the business. Start by specifying the voting rights associated with each class of ownership or membership interest. This might be based on the percentage of ownership or other criteria agreed upon by the members. Clearly outline the voting procedures, including how meetings will be called, quorum requirements, and voting mechanisms. Emphasize the importance of participation and engagement in decision-making processes to ensure the collective interests of the business are served. Additionally, consider provisions for resolving voting disputes or deadlock situations, promoting effective governance and decision-making. Regularly review and update these provisions as the business grows and ownership dynamics evolve, maintaining transparency and accountability within the organization.

Members’ Transfer of Membership Interest

A plan for how members may exit the organization, and what happens to their share of the pie.

In your company agreement, outlining how members can transfer their membership interests is crucial for maintaining stability and transparency. Start by setting clear guidelines for when and how such transfers can occur, including any restrictions or conditions. Consider implementing a right of first refusal, allowing existing members the opportunity to purchase the transferring member’s interest before it’s offered to external parties. Specify the process for valuing membership interests to ensure fairness and prevent disputes. Additionally, address any approval requirements from the remaining members to uphold the integrity of the ownership structure. Lastly, emphasize the importance of communication and collaboration among members throughout the transfer process to minimize disruption and preserve the cohesion of the business. Regularly review and update these transfer provisions to adapt to changing circumstances and protect the interests of all stakeholders.

Dissolution and Liquidation of Shares

How the shares can be and have been divided.

Start by outlining the circumstances under which dissolution or liquidation may occur, such as unanimous member agreement or specific triggering events. Specify the steps involved, including notifying members, settling debts and obligations, and distributing remaining assets. Detail how proceeds will be distributed among members, considering factors like ownership percentages and capital contributions. Additionally, address any regulatory requirements or legal obligations associated with the dissolution process. Emphasize the importance of clear communication and collaboration among members to facilitate a smooth and orderly transition. Regularly review and update these provisions to align with the evolving needs and circumstances of the business.

Conclusion

If a company has adopted a Company Agreement, the company and its members must operate in accordance with the provisions of the Company Agreement. However, in Texas, if a specific circumstance is not covered by a provision in the Company Agreement, then the company must look for guidance under the default provisions of the TBOC.

There is no such thing as “one size fits all” when it comes to drafting a Company Agreement. What goes into the Company Agreement depends on the specific circumstances surrounding each LLC. Each new business start-up is unique – so each Company Agreement should be drafted to best explain your business structure.

Company Agreements Explained