The Texas LLC is now the dominant business form for closely-held companies in Texas. The flexibility it offers, pass-through taxation, limited liability, broad freedom of contract through the company agreement, has made it the default choice for new businesses and the destination for many existing entities that converted from corporate or partnership forms.
That flexibility creates its own set of disputes when LLC members fall out. The TBOC supplies default rules for matters the company agreement does not address, but the company agreement controls most aspects of the LLC’s governance and the relationships among its members. Disputes that look superficially similar to corporate shareholder disputes are analyzed under a different framework keyed to the company agreement and to TBOC Title 3. Get that framework wrong at the start, and every later argument lands in the wrong place.
The TBOC and the company agreement
Texas LLCs are governed by Title 3 of the Texas Business Organizations Code. The statutory framework is shorter and less prescriptive than the corporate provisions in Title 2 because the LLC structure is intentionally flexible.
The most important feature of the TBOC LLC framework is the extent to which the company agreement controls. TBOC section 101.052 establishes that the company agreement governs the LLC’s internal affairs, the rights and duties of members, and most operational matters. The agreement can override most default rules in the statute.
What the company agreement typically addresses:
- Member rights to vote, distribute, and participate in management.
- Management structure, member-managed or manager-managed.
- Capital contribution requirements and consequences of failure to contribute.
- Profit and loss allocation.
- Transfer restrictions on membership interests.
- Withdrawal, expulsion, and dissolution procedures.
- Dispute resolution mechanisms.
- Fiduciary duties and modifications to default duties.
- Buy-sell provisions for departure or death of members.
What the company agreement cannot do:
- Eliminate the implied contractual covenant of good faith and fair dealing.
- Restrict the duty of loyalty in ways that would permit intentional misconduct.
- Modify certain statutorily mandated provisions.
Reading the company agreement carefully is the first step in any LLC dispute. Misreading the agreement sends counsel down the wrong analytical path on every subsequent issue.
Fiduciary duties in Texas LLCs
TBOC section 101.401 makes the company agreement the controlling source of member and manager duties. The agreement can expand, restrict, or eliminate most duties, subject to the implied covenant of good faith and fair dealing.
When the company agreement is silent on duties, Texas courts apply default fiduciary duty principles. Managers in a manager-managed LLC and managing members in a member-managed LLC generally owe the LLC duties of loyalty, care, and good faith. The contours are analogous to corporate fiduciary duties but modified for the LLC context.
The most contested questions in LLC fiduciary duty cases:
What duties did the company agreement modify? Many company agreements eliminate or substantially restrict duties. The specific language matters.
Did the conduct fall within the modified scope? Even when duties are restricted, the implied covenant of good faith and fair dealing imposes limits.
Was the conduct a derivative or direct claim? Conduct that harmed the LLC supports derivative claims with their procedural requirements. Conduct that directly harmed a specific member supports direct claims.
See Fiduciary Duty Litigation for the broader treatment.
Common LLC member disputes
Manager misconduct. The manager has engaged in self-dealing, misappropriation, or other misconduct harmful to the LLC or to specific members. The substantive analysis runs through company agreement provisions on manager duties and through any limitations imposed by the implied covenant.
Capital call disputes. A member has refused to make a required capital contribution. The consequences depend on what the company agreement provides, dilution, default penalties, forced sale of interest, expulsion in some cases.
Distribution disputes. Members disagree about whether and how distributions should be made. Manager-managed LLCs typically vest distribution discretion in the manager subject to specific guideposts; the manager’s exercise of that discretion can be challenged for bad faith or breach of contract.
Transfer disputes. A member has transferred or attempted to transfer an interest in violation of the company agreement’s transfer restrictions. Most LLC company agreements impose substantial transfer restrictions, and breaches generate both contract claims and operational disruption.
Information and inspection rights. A member has been denied access to company information that the agreement or TBOC section 101.502 requires the LLC to provide.
Expulsion and withdrawal disputes. Members disagree about whether a member has been or should be expelled, or whether a member’s attempt to withdraw was effective.
Dissolution disputes. Members disagree about whether the LLC should be dissolved and on what terms.
Available remedies
Texas LLC dispute remedies include:
Damages. Contract damages for breach of the company agreement; fiduciary duty damages for breach by managers or members; tort damages where applicable claims are made.
Specific performance. When the company agreement provides for specific procedures (buyouts, valuations, transfer rights) that the breaching party has refused to perform.
Equitable relief. Injunctions to prevent ongoing breaches; declaratory relief on contested governance issues; mandamus-style relief to compel access to information or required meetings.
Derivative recovery. Damages recovered on behalf of the LLC for harm to the entity caused by manager misconduct.
Judicial dissolution. Under TBOC section 11.314, available when it is not reasonably practicable to carry on the business of the LLC. The standard is demanding and the remedy is rarely granted.
Receivership. Under TBOC section 11.404, available in cases of illegal, oppressive, or fraudulent conduct or deadlock.
Attorney’s fees. Available under Chapter 38 for contract claims; under the company agreement where it provides for fee shifting; under specific statutory frameworks for related claims like the TTLA.
Strategy for plaintiffs
LLC member dispute strategy starts with the company agreement. Pull every operative document, the certificate of formation, the original company agreement, all amendments, any side agreements, any buy-sell agreements. Read them.
Identify whether the dispute is direct or derivative. Some claims belong to specific members because the harm was to those members directly; some claims belong to the LLC because the harm was to the entity. The procedural rules differ, and pleading the wrong type of claim creates dismissal risk.
Consider fast-acting remedies. Many LLC disputes involve ongoing misconduct that compounds while litigation runs. Emergency relief, receivership in the most serious cases and injunctive relief in many others, preserves the LLC’s value while the underlying disputes are resolved. See Emergency Relief in Texas Business Litigation.
Pursue contract remedies aggressively. The company agreement is usually the strongest source of relief because the parties agreed to its terms. Pure fiduciary duty cases are often more difficult than contract cases keyed to specific company agreement provisions.
Strategy for defense
LLC defense strategy also starts with the company agreement. Many claims fail on their face when measured against the company agreement’s specific provisions.
Identify duty modifications. The company agreement may have expanded, restricted, or eliminated the duties the plaintiff is suing on. Even where the implied covenant remains, the modified duties significantly narrow the case.
Use the procedural barriers. Derivative claims require demand and specific pleading; standing requirements limit who can sue; notice provisions in many company agreements impose pre-suit requirements. Defendants who use these mechanisms successfully can defeat or narrow many cases.
The company agreement is the case
We start with the company agreement and work outward, because misreading it wastes motion on both sides. We plead specific contract breaches keyed to specific provisions rather than omnibus fiduciary duty actions, which tend to drift. And we stay alert to emergency relief: when manager misconduct is ongoing, waiting for trial usually means watching the LLC’s value erode, so pre-suit or early-suit relief preserves the position.
The document the members signed at formation usually decides who wins. Read it first, plead to it, and the rest of the case narrows fast.
Frequently Asked Questions
What law governs Texas LLC member disputes?
The Texas Business Organizations Code, Title 3 (governing limited liability companies), together with the LLC's company agreement (the Texas equivalent of an operating agreement). The TBOC provides default rules and certain mandatory provisions, but allows broad freedom of contract through the company agreement. Most LLC disputes turn first on what the company agreement says and second on what the TBOC supplies by default for matters the agreement does not address.
What fiduciary duties do Texas LLC managers and members owe?
The default rule under TBOC section 101.401 is that the company agreement governs duties. The company agreement can expand, restrict, or eliminate most duties, with specific statutory exceptions. Where the company agreement is silent, Texas LLC managers generally owe the LLC duties of loyalty and care analogous to corporate fiduciary duties. Members in a member-managed LLC owe similar duties. The company agreement is usually the starting point for any duty analysis.
Can a Texas LLC member be expelled?
Only if the company agreement provides for expulsion or other procedures lead to that result. The TBOC does not provide a default judicial expulsion remedy comparable to some partnership laws. Most LLC company agreements address voluntary withdrawal, involuntary withdrawal upon specified events, and sometimes expulsion procedures. Without an expulsion provision in the company agreement, removing a member requires consent, buyout negotiation, or judicial dissolution.
What is a derivative action in the Texas LLC context?
A derivative action is a lawsuit brought by a member on behalf of the LLC to recover for harm caused to the LLC itself. Texas law allows LLC derivative actions in circumstances analogous to corporate derivative actions, with a demand requirement and standing rules. The procedure is governed by general Texas derivative action law as applied to LLCs. Derivative actions are common in cases where managers have engaged in self-dealing or misappropriation that harmed the LLC.
Can a Texas LLC be judicially dissolved?
Yes, in limited circumstances under TBOC section 11.314. Judicial dissolution is available when it is not reasonably practicable to carry on the business of the LLC in conformity with its governing documents. The standard is demanding, courts require more than disagreement or unhappiness among members. Genuine deadlock that prevents the LLC from functioning, misconduct by managers that has destroyed the business, or impossibility of continued operation are the kinds of circumstances that support the remedy.