In the United States, a limited liability company (LLC) is a business entity formed under state law by filing articles of organization with the Secretary of State.
An ownership change of an LLC in Texas is more difficult than many people think, especially given the flexibility of the business entity.
Members, on the other hand, are the individuals who own Limited Liability Companies in Texas. They are referred to as members, although their ownership rights are not as freely transferable. Let's have a closer look at how LLC owners can transfer ownership of a Texas LLC.
What Do Your Texas Operating Agreements Say?
The Operating Agreement (OA) for an LLC describes the company's structure and regulations, including the ownership change process. Without a Company Agreement, Texas law's default provisions would apply to the LLC's procedures.
The following items are typical in most Company Agreements:
- The responsibilities and rights of Texas LLC members are outlined in the operating agreement
- For each LLC member, the percentage of ownership is displayed
- How profits and losses are distributed
- The rules and criteria for voting
- Steps to buying out an LLC ownership or membership interest
- Steps for becoming an LLC member
- Structure for buy/sell agreements
How to Transfer Ownership of a Texas LLC?
A member may transfer their ownership interest in a Texas LLC to another person or business. This is why it is important to include the sale of membership rules in the governing documents.
An individual may transfer ownership by selling his/her membership interest. The buyer will be added as a new member, and all profits and losses are divided accordingly.
A member may also transfer their membership interest through an LLC's operating agreement or buy/sell company agreement that is created by all current LLC members. A common provision as per the Texas law would be for the new owner to buy out other members' interests at fair market value.
Partial Transfer (The Buyout)
A Texas LLC buyout provision gives a member wanting to leave the firm the option of selling his or her membership interest to the other LLC members, who will then distribute it equally amongst themselves.
The remaining LLC members enter a buy/sell agreement with the departing member that includes information such as:
- Each member’s ownership interest in the LLC and its value
- The valuation approach for determining each member's stake in the LLC
- Whether it is possible for a departing member can force a buyout
- What leads to a buyout
- The right of first refusal for remaining members is determined by the type of relationship that exists between the departing member and the remaining members.
Full Transfer (Selling Your LLC)
There may come a time when you and the other LLC members want to sell your entire firm to someone else.
Determine whether the buyer wants to acquire the whole Texas LLC or just its assets. Before allowing the sale of the whole company, your OA may need each LLC member's consent.
Keep in mind that selling an entire company is a huge task for business owners. As a result, it's a good idea to engage the services of a qualified Texas attorney to look into your public accounts.
Your lawyer can assist you in ensuring that the transaction is legal under both texas law and federal law.
There are other scenarios, such as the death or disability of a member that requires buyout. When one member dies, their heirs inherit their interest in the LLC.
If you own half the company and your brother owns another half, what happens to those interests when you both die?
Your LLC's Operating Agreement should include an anti disturbance clause. This clause states that if one owner dies, ownership rights transfer to the remaining owners. This means there is no change in management authority; nothing needs to be voted on.
The situation is different with a disabled member. Disability is unfortunate and sad for family members of the affected person.
If you want to ensure business continuity after your LLC member becomes disabled, you may need to give the LLC member's family extra power.
If the disabled member is the sole shareholder and manager of your LLC, then you can vote to buy out his or her interest.
On the other hand, if there are two members who equally share management authority, it's possible that one decides to voluntarily buy out his or her disabled partner's interest in the LLC.
The Operating Agreement should clearly spell out the provision for a disabled member buyout and state who decides how it's done.
Read More: Changing Ownership Percentage of an LLC
Notify Secretary of State and Relevant Parties
After submitting all the necessary paperwork to your Secretary of State, you must send out a written notice of these transactions to any relevant financial institutions.
Make sure the LLC's bank and credit card issuers, as well as insurance companies, know that there has been a change in management authority.
Your Texas LLC operating agreement should clearly spell out the process for members to sell their interests or decide on a disabled member buyout.
In addition, an attorney specializing in business certificate of formation can handle all the paperwork and filings required by the Texas Secretary of State.
The final step is to notify your state and federal agencies and state agencies like the Texas Comptroller about these changes. You may need to file new tax returns or pay transfer taxes because of the member buyout.
Finally, you'll want to complete transactions as soon as possible after drafting your new operating agreement. If you need anyone to provide legal advice while doing so, contact an attorney.
Can You Transfer an LLC to Another Person?
An LLC can be sold to another person or entity, and the ownership interest transferred through an assignment of interest.
What if the Person You Want to Transfer Your LLC to Isn’t on the LLC Agreement?
If the person or entity you want to transfer your interest in is not a party on the LLC Agreement, then they will not have the rights associated with being a member of the LLC unless they are assigned that right pursuant to an assignment of interest.
How Do I Change the Manager of an LLC in Texas?
To change the manager of your LLC, you can either:
- Amend your Articles of Organization and LLC's Operating Agreement to remove the current manager and appoint a new one
- Sell all or part of your interest to another person or entity, which would grant them membership status in a multi-member LLC.
How Do I Remove a Partner From My LLC?
To remove a partner from an LLC, there are two ways to do so. The first way is by having the member vote to remove the individual.
The second way is to have the members sign an amendment to your OA stating that they no longer wish for one of their own members to remain in the company.
Changing Ownership of a Texas LLC: Conclusion
To conclude, the articles of organization, operating agreement, and any provisions in the agreement itself will govern how an LLC changes hands.
A well-planned entity would include a member buyout provision in the initial certificate of formation documents.