Setting Up a Manufacturing Relationship in Texas

In Texas, common manufacturing agreements include Original Equipment Manufacturing (OEM) agreements, contract manufacturing agreements, and toll manufacturing agreements. Each serves different purposes: OEM agreements allow one company to produce components that another will market under its brand; contract manufacturing involves outsourcing production entirely; and toll manufacturing occurs when one company processes materials owned by another. Choose the agreement type that best aligns with your business model and relationship structure.

Texas manufacturing relationships are primarily governed by the Texas Business & Commerce Code, which incorporates the Uniform Commercial Code (UCC). Texas also has specific regulations regarding workplace safety through the Texas Department of Insurance, environmental compliance through the Texas Commission on Environmental Quality (TCEQ), and labor laws enforced by the Texas Workforce Commission. Additionally, certain industries may face sector-specific regulations, such as food manufacturing or medical device production.

For Texas manufacturing operations, consider: (1) forming a limited liability entity such as an LLC or corporation to shield personal assets; (2) obtaining comprehensive insurance including general liability, product liability, and business interruption coverage; (3) implementing clear quality control procedures; (4) drafting contracts with indemnification clauses and liability limitations; and (5) ensuring compliance with all Texas safety regulations. Texas follows modified comparative negligence rules, so documenting safety protocols and product warnings is particularly important.

In Texas manufacturing agreements, explicitly address: (1) ownership of existing IP each party brings to the relationship; (2) ownership of newly developed IP during the manufacturing process; (3) licensing terms for any shared IP; (4) confidentiality provisions to protect trade secrets; (5) non-compete clauses (enforceable in Texas if reasonable in scope); and (6) remedies for IP infringement. Texas courts generally enforce well-drafted IP provisions, but clarity is essential to avoid disputes. Consider filing for appropriate IP protections before beginning the manufacturing relationship.

A comprehensive Texas manufacturing contract should include: (1) detailed product specifications and quality standards; (2) pricing structure and payment terms; (3) delivery schedules and logistics responsibilities; (4) term length and renewal conditions; (5) termination rights and procedures; (6) warranties and representations; (7) intellectual property ownership and licensing; (8) confidentiality provisions; (9) dispute resolution mechanisms (Texas allows for binding arbitration); (10) force majeure clauses; and (11) choice of law provisions (specify Texas law if preferred).

Yes, Texas manufacturing operations must comply with environmental regulations primarily enforced by the Texas Commission on Environmental Quality (TCEQ). Depending on your industry, you may need permits for air emissions, wastewater discharge, and waste management. Texas also implements federal EPA regulations. Some areas, particularly around Houston, Dallas, and San Antonio, have stricter air quality requirements. Conduct an environmental compliance assessment before beginning operations and implement appropriate monitoring systems to ensure ongoing compliance.

To protect your business in Texas: (1) Include comprehensive breach provisions in your contract specifying what constitutes a breach and remedies available; (2) Consider requiring performance bonds for critical manufacturing relationships; (3) Include audit rights to monitor compliance; (4) Specify dispute resolution procedures (Texas courts generally enforce arbitration clauses); (5) Include liquidated damages provisions for quantifiable breaches; and (6) Maintain contingency plans for alternative manufacturing sources. Texas follows the UCC for commercial disputes, which provides remedies including specific performance and damages.

Texas offers favorable tax treatment for manufacturers, with no state income tax. However, you'll need to consider: (1) Texas Franchise Tax (margin tax) on businesses with revenue over $1.23 million; (2) Local property taxes on manufacturing equipment and facilities; (3) Sales and use tax on purchases (manufacturing equipment may qualify for exemptions); (4) Potential tax incentives through the Texas Enterprise Fund or local economic development programs; and (5) Employment taxes. Consult with a Texas tax professional to optimize your tax position and identify available incentives for manufacturing operations.

For effective quality control in Texas manufacturing: (1) Clearly define quality standards, testing protocols, and acceptance criteria in your contract; (2) Establish regular inspection rights and procedures; (3) Implement a formal non-conformance process with defined remedies; (4) Consider requiring ISO certification or industry-specific quality standards; (5) Address product liability concerns through appropriate warranties and indemnification; and (6) Document all quality issues thoroughly. Texas follows strict product liability laws, so maintaining quality control documentation is crucial for defending potential claims.