How To Change Ownership of an LLC in Texas? (Simple Guide)
An ownership change of an LLC in Texas can be accomplished in two ways, the members may opt for a partial or complete transfer of their business interest.
With over a decade of practice as a business consultant for limited liability companies in various states coupled with thorough research on LLC ownership change, I will provide a comprehensive guide on how to implement the change in ownership of an LLC in Texas.
I collaborated with legal advisors and attorneys to ensure the content was accurate and credible.
Quick Summary
- To change LLC ownership in Texas, members can opt for a partial or full transfer of their interests in the company.
- Other scenarios such as the death or disability of a member would follow the protocol stated in the organizational agreement.
- To make the transfer official, notify the Secretary of State and other relevant parties.
How to Transfer Ownership of a Texas LLC?
To transfer ownership of a Texas LLC, members can either opt for a buyout or sell their limited liability company outright.
A member may transfer their ownership interest in a Texas LLC to another person or business entity. 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.
1. 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 a departing member can force a buyout of his or her membership interests
- 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.
2. 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.
Other Scenarios
There are other scenarios, such as the death or disability of a member that requires a buyout. When one member dies, their heirs inherit their interest in the LLC.
Death of a Member
If you own half the company and your brother owns another half, what happens to those interests when one of you dies?
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.
Disabled Member
The situation is different with a disabled member.
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 two members equally share management authority, one may decide to voluntarily buy out his or her disabled partner's interest in the LLC.
The Operating Agreement should spell out the provision for a disabled member buyout and state who decides how it's done.
Read our article for more information about changing ownership percentage of an LLC.
Notify Secretary of State and Relevant Parties
Owners should notify the Secretary of State and other relevant parties through a written notice of these transactions.
The LLC management should tackle the following before officially transferring ownership:
- 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 spell out the process for members to sell their interests or decide on a disabled member buyout.
- An attorney specializing in the business certificate of formation can handle all the paperwork and filings required by the Texas Secretary of State.
- Notify your state and federal 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.
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What Do Your Texas Operating Agreements Say?
The Texas Operating Agreement for an LLC describes the company's structure and regulations, including the ownership change process [1]. Without a Company Agreement, Texas law's default provisions would apply to the LLC's procedures.
The following items are typical in most Company Operating 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
FAQs
What if the Person You Want to Transfer Your LLC to Isn’t on the LLC Agreement?
If the person you want to transfer your LLC to is not on the LLC Operating Agreement, then they will not have the rights associated with being a member of the LLC unless they are assigned that right under an assignment of ownership interest.
How Do I Change the Manager of a Texas LLC?
To change the manager of your Texas 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 LLC ownership 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 Texas LLC?
To remove a partner from a Texas LLC, you can have a vote to remove the individual. You can also have the members sign an amendment to your OA stating that they no longer wish for one of their members to remain in the company.
Changing Ownership of a Texas LLC
Changing ownership of a Texas LLC can be done by partial or full transfer.
If a member wants to sell their LLC ownership rights, they can opt for a partial transfer or buyout. If all the members agree to sell the entire company, a full transfer can be done to accomplish this.
To conclude, you need to amend your LLC operating agreement. A well-planned entity would include a member buyout provision and full transfer clause in the initial certificate of formation documents.
References:
- https://www.sos.state.tx.us/corp/managementinfofaqs.shtml#mgmt9
