Most Texas limited liability companies are formed in an afternoon. Somebody files a certificate of formation with the Secretary of State, the entity exists, and the company agreement either gets downloaded from a template or never gets signed at all. Years later, when two of the three owners want to sell and the third does not, that afternoon turns out to have been the most consequential hour in the company’s history.
The Texas Business Organizations Code is written to let owners set their own rules. That flexibility is the point of the Texas LLC, and it is also the trap. When the agreement says nothing, the statute fills the gap, and the statutory defaults are frequently not what anyone at the table would have chosen.
Here is what the company agreement controls, what the defaults do when it is silent, and the specific provisions that decide whether an ownership disagreement becomes a conversation or a lawsuit.
The company agreement is the operating statute for your company
Section 101.052 of the Business Organizations Code provides that the company agreement of a limited liability company governs the relations among members, managers, and officers of the company, assignees of membership interests, and the company itself. That is a broad grant. Within limits, whatever the owners write down is the law of that company.
The limits sit in Section 101.054, which lists the provisions a company agreement may not waive or modify. Among them are Section 101.101 on member requirements, Section 101.151 on enforceable promises, Section 101.206 on prohibited distributions, Section 101.501 on supplemental records, and, importantly for what follows, Chapter 11, which governs winding up and termination.
Everything outside that list is negotiable. Most of what causes ownership disputes sits outside that list.
Nobody can quit, and nobody can be forced out
Start with the provision that surprises owners most often. Section 101.107 states it in one sentence: a member of a limited liability company may not withdraw or be expelled from the company.
Read that as a business rule rather than a legal one. Absent contrary language in the company agreement, a Texas LLC member cannot resign and demand to be cashed out. There is no statutory right to a buyout, no statutory valuation method, and no statutory exit date. A member who wants out and has no contractual mechanism has very few moves that do not involve a courthouse.
The mirror image is equally true. A member who stops contributing, moves to another state, goes to work for a competitor, or simply becomes impossible to work with cannot be removed just because the others want it. Expulsion is a power the agreement has to create.
Section 101.107 is not on the non waivable list, which means the agreement can change both halves of it. A buy sell provision, a put right, a forced sale on defined trigger events, a valuation formula: all of that is available, and none of it exists by default.
Who actually manages the company
Section 101.251 provides that the governing authority of a limited liability company consists of the managers, if the company agreement provides that the company is managed by one or more managers, or the members, if the agreement provides that the company is managed by the members. If the agreement does not address it, the question falls back to whether the certificate of formation designates managers.
That is a simple rule with a common failure mode. A certificate is filed designating a manager, the company agreement is never signed or says something different, and three years later two owners are arguing about whether a contract one of them signed actually bound the company. The fix is not complicated. It is making sure the certificate and the agreement say the same thing, and then writing down which decisions the manager can make alone.
That second list is where most agreements are thin. Ordinary operating decisions should be quick. Some decisions should not be: taking on debt above a threshold, selling substantially all the assets, admitting a new member, changing the business line, signing a lease with a term past a certain number of years, initiating or settling litigation, making a distribution. A short schedule of major decisions requiring a supermajority or unanimity is worth more than twenty pages of boilerplate.
What a buyer of a membership interest actually gets
Section 101.108 provides that a membership interest may be wholly or partly assigned, and that the assignment does not entitle the assignee to participate in the management and affairs of the company, to become a member, or to exercise any rights of a member. The assignment is also not an event requiring the company to wind up.
In plain terms, someone who buys or inherits a membership interest gets the economics and not the vote, unless the agreement or the members say otherwise.
That default is protective, and it is also incomplete. It does not tell you what happens when a member dies, divorces, files for bankruptcy, or pledges their interest to a lender. It does not give the company or the remaining members a right of first refusal. It does not stop an interest from ending up in the hands of someone the other owners would never have gone into business with, holding an economic claim on distributions forever.
Transfer restrictions, a right of first refusal, drag along and tag along rights, and a defined process for death and divorce are the provisions that close that gap. They are inexpensive to draft at formation and nearly impossible to impose later, because by then the member who would be restricted has to agree to be restricted.
Deadlock, and the one remedy you cannot draft away
Two members with fifty percent each is the most common ownership structure in closely held Texas companies and the one with the least workable default.
When those two stop agreeing, Section 11.314 is the statutory backstop. It permits a district court, on the application of an owner, to order the involuntary winding up and termination of a partnership or limited liability company if the court determines that the economic purpose of the entity is likely to be unreasonably frustrated, that another owner has engaged in conduct relating to the entity’s business that makes it not reasonably practicable to carry on the business with that owner, or that it is not reasonably practicable to carry on the entity’s business in conformity with its governing documents.
Note what that remedy is. It is not a buyout and it is not a referee. It is the court winding the company up. For a profitable operating business, it is close to the worst available outcome for everybody.
And because Section 101.054 makes Chapter 11 non waivable, the company agreement cannot contract that remedy out of existence. What the agreement can do is make it unnecessary. A tiebreak mechanism costs nothing to write and takes several forms: an odd numbered manager board, a neutral third manager with a vote reserved for deadlock, a mandatory mediation step before any owner can file suit, a shotgun buy sell where one side names a price and the other chooses whether to buy or sell at it, or an agreed appraisal process with a defined valuation standard.
Any of them beats the alternative. The question worth asking at the next owners meeting is simple. If the two of us disagreed tomorrow about something that mattered, what does our paperwork say happens next? If the answer is nothing, that is the project.
Fiduciary duties are adjustable, and the default is not fully settled
Section 101.401 provides that the company agreement of a limited liability company may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person owes to the company or to a member or manager.
That is a powerful dial, and it turns both ways. An agreement can impose explicit duties of loyalty and care, spell out how conflicts get disclosed and approved, and define what counts as a competing business. It can also narrow duties, permit named outside activities, and preapprove specified related party transactions.
What Texas law says about the default, when the agreement is silent, is a genuinely contested area. Texas courts have addressed the fiduciary duties of LLC managers and members in a variety of postures without producing the kind of clean, comprehensive rule that owners would like to rely on, and the answer can turn on the role the person occupied and the facts of the specific relationship. Anyone who tells you with total confidence what duties your co owner owes you by default, without reading your documents, is overstating the state of the law.
The practical consequence is not complicated. Write it down. A company agreement that defines the duties, the disclosure process, and the approval mechanism removes the question from the realm of argument.
What Senate Bill 29 added to the drafting menu
Senate Bill 29, effective May 14, 2025, made a set of amendments to the Business Organizations Code aimed at making Texas a more attractive home for entities. Several of them are drafting options rather than automatic changes, which means they only help a company that goes and uses them.
The bill allows entities to include jury trial waivers in their governing documents for internal entity claims, and provides that such a waiver is enforceable even if the governing document was not individually signed. It allows entities to designate an exclusive Texas forum and venue for internal entity claims. It codified a business judgment rule presumption that directors, officers and managers acted in good faith, on an informed basis, in the entity’s best interests, and in compliance with law, which applies to publicly traded entities and to entities that affirmatively opt in. It permits qualifying corporations to set a minimum ownership threshold of three percent for shareholder derivative actions, and it narrowed what has to be produced in response to books and records demands, excluding emails, texts and social media unless they effectuate an action by the entity.
Not every one of those provisions reaches every entity type in the same way, and the opt in mechanics matter. Which of them a specific limited liability company can use, and whether it should, is a question to work through with counsel against the actual governing documents rather than a general rule to apply.
The broader point stands regardless. Since May 2025 there have been governance tools available in Texas that did not exist before, and they only apply to companies that amend their documents to take them.
One more clause worth a conversation
Section 25A.004(d) of the Government Code permits parties to agree by contract to the jurisdiction of the Texas Business Court for qualifying matters. For a company whose ownership disputes would clear the statutory dollar threshold, that is now a choice available at drafting time. It is not automatically the right answer. It is a decision that should be made deliberately rather than discovered during a fight.
A short review list
If you do nothing else this quarter, pull the company agreement out and answer these in order.
Does the agreement exist, is it signed by everyone, and does it match the certificate of formation on whether the company is member managed or manager managed? Is there a list of decisions that require more than a simple majority? Is there any mechanism at all for a member to exit, and a method for valuing what they exit with? Are transfers restricted, and is there a defined process for death, divorce, and bankruptcy of a member? If the owners deadlocked tomorrow, what does the document say happens? Are fiduciary duties defined, or left to argument? Has the agreement been touched since May 2025?
An owner who can answer those seven questions from the document is in a very different position than one who cannot. The work is measured in hours, and it is almost always cheaper than the first week of the dispute it prevents.
If you want help drafting a company agreement, updating one that has not been reviewed in years, or working through a buy sell and deadlock mechanism before you need it, the business attorneys at Hanshaw Kennedy Hafen work with companies across Frisco, Plano, McKinney, and the surrounding North Texas communities. Visit our Business Law page to learn more.
Related reading
- LLC vs. S-Corp in Texas: Which Structure Is Right for Your Business?
- What Happens When a Texas Business Partnership Breaks Down?
About the author: John M. Hafen is a partner at Hanshaw Kennedy Hafen in Frisco, Texas. He focuses on complex commercial litigation and serves as outside counsel to companies across North Texas.