Our LLC Has No Operating Agreement. What Happens in a Dispute?

No written agreement does not mean no agreement

Start with the definition. Section 101.001(1) of the Texas Business Organizations Code defines a company agreement as any agreement, written, implied or oral, of the members concerning the affairs or conduct of the business. So a two-member LLC that never signed anything may still have an agreement: the email in which the members agreed to split profits 70/30, the years of actual practice in which one member ran operations and the other handled sales, the text in which both agreed not to take salaries. Those are evidence of an implied or oral company agreement, and section 101.052(a) says the company agreement governs the relations among members and managers.

The difficulty is proof. An oral agreement is proved by testimony and conduct, and the two members will remember it differently. Where the agreement cannot be proved, or is silent on the disputed point, section 101.052(b) applies the Code's default rules.

The default rules that decide most disputes

Two of these surprise owners most. First, votes are per member, not per percentage, so a 20 percent member and an 80 percent member each have one vote unless an agreement says otherwise. Second, profits follow contributions as recorded, not the handshake split the members remember. If one member contributed cash and the other contributed 'sweat,' and nothing records the agreed value of the sweat, the default allocation may bear no resemblance to the deal.

Example

Suppose two friends form a Dallas food-truck LLC through an online service. The certificate does not mention managers. One puts in $60,000; the other puts in no cash but runs the truck seven days a week. They never sign an agreement but agree by text to 'split everything 50/50.' Three years later they fall out. Under the defaults, both are governing members with one vote each (deadlock on every disputed decision), and absent proof of the 50/50 deal, profits are allocated by recorded contributions, which favors the cash member heavily. The text is evidence of an oral company agreement that overrides the default allocation, if a court accepts it. Which rule applies is the whole case.

What duties do the members owe each other?

Here the Code is quieter than owners expect. Unlike the partnership chapter, which lists duties of loyalty and care, the LLC chapter does not define members' or managers' duties. Section 101.401 says the company agreement may expand, restrict or eliminate duties, including fiduciary duties; with no agreement, nothing has been restricted or eliminated, and courts decide from the relationship what duties exist. A member who manages the company and controls its money is generally held to duties toward the company. Whether members owe duties to one another depends on the facts, including whether one relied on the other and whether a relationship of trust existed before the LLC. The detail is in what fiduciary duties partners and LLC managers owe in Texas.

How disputes get resolved without an agreement

Because no one can withdraw and no one can be expelled, a falling-out in a no-agreement LLC resolves in one of four ways:

1. A negotiated buyout. The usual ending. The price is whatever the parties agree, informed by what each side would face in court.
2. A direct or derivative lawsuit. For money taken, decisions made without the required vote, or records refused. The Code's records statute (section 101.502) works regardless of whether an agreement exists; see an LLC member's right to records.
3. Judicial winding up under section 11.314. A district court may order the LLC wound up on a member's application if the economic purpose of the entity is likely to be unreasonably frustrated, another owner's conduct makes it not reasonably practicable to carry on the business with that owner, or the business cannot reasonably be carried on in conformity with the governing documents. A two-member LLC in which the members cannot agree on anything is the classic case.
4. Receivership under section 11.404. When the governing persons are deadlocked and irreparable injury is threatened, or company property is being misapplied, and lesser remedies are inadequate.

For deadlocks specifically, including the 50/50 problem the equal-vote rule creates, see how Texas courts resolve a deadlocked 50/50 partnership.

What you can still prove

Evidence of the real deal matters because it can displace a default. Collect: formation emails and texts about ownership and profit splits; the capital account or contribution records the company kept; tax returns and K-1s showing how profits were actually allocated and reported year after year; bank records showing distributions; and any minutes, consents or written approvals. Consistent conduct over years is strong evidence of an implied agreement, and K-1s that reported 50/50 for five years are hard to reconcile with a later claim that profits were always meant to follow cash contributions.

Is it too late to sign an agreement?

No, and it is often the best outcome of a dispute. Members who are still speaking can adopt a written company agreement that fixes the votes, allocations, exits and duties going forward and settles the past. Section 101.052(g) makes a member bound by the company agreement whether or not he signs it, so the agreement should be adopted by the vote the members decide is required, documented in writing. Where the relationship is beyond repair, the same provisions get negotiated once, in a buyout, and the agreement ends.

When to involve a litigator

Before you argue about who owns what. The defaults decide ownership, votes and exit, and your own emails and tax returns decide whether a default even applies. A litigator reads those documents against the Code, tells you which rule governs each disputed point, and sets up the records demand and, if needed, the section 11.314 petition that gives a negotiation its deadline. Tina Wysk represents owners on both sides of LLC and partnership disputes in Dallas state and federal courts and in arbitration. For the scope of that work see shareholder and partnership disputes.