Transferring LLC ownership in Texas is more complicated than some business owners expect, especially considering the formation flexibility of the entity. Compared to corporations, ownership transfers present specific challenges to LLC members wanting out of a business. Shareholders in a corporation can freely sell their ownership interests by simply selling their shares in the company.
Conversely, LLC owners are called members, but their ownership interests are not as freely transferable. Subject to the terms of the Operating Agreement (OA), all LLC members must give consent to transfer ownership rights in the company. The lack of formalities for forming LLCs makes the process of transferring ownership more complicated.
Confused? That’s alright. Let’s take a closer look at how to transfer ownership interest in a Texas LLC and how our formation and compliance products and services can support you. If you need to form your Texas LLC first, head over to our Texas LLC Formation Services page.
First Things First: Texas Operating Agreements
An LLC’s Operating Agreement (OA) outlines the structure and rules that govern the business. Without an Operating Agreement, default provisions of Texas law govern the procedures of the LLC. Operating Agreements typically include information critical to running your business, such as:
- Rights and obligations of LLC members
- Percentage of ownership for each LLC member
- How profits and losses get allocated
- Voting rules and requirements
- Procedure for buying out an LLC member’s interest
- Guidelines for becoming an LLC member
- Structure for buy/sell agreements
Although an Operating Agreement isn’t required under Texas law, having one prevents potential disputes between LLC members down the road.
Having a clear and concise Operating Agreement helps avoid unexpected and unnecessary conflicts in the future. ZenBusiness offers an Operating Agreement template to assist you in drafting the right OA for your business.
How to Transfer Ownership of a Texas LLC
Ownership transfers can arise in several scenarios. The two most common ways to transfer ownership in an LLC without dissolving the business are a partial transfer of ownership and selling the entire LLC.
Partial Transfer in Texas: The Buyout Provision
A buyout provision allows an LLC member seeking out of the business to sell his or her membership interest to the remaining LLC members, which is then distributed equally among them. To execute a buyout, the remaining LLC members enter a buy/sell agreement with the departing member that includes information such as:
- The value of each member’s interest in the LLC
- The valuation method for determining the value of each member’s interest in the LLC
- Whether a departing member can force a buyout
- Events that trigger a buyout
- Whether remaining members have the right of first refusal
The terms included in the buy/sell agreement are spelled out in a well-drafted Operating Agreement.
To sell your LLC interest to a third party, you need approval from all other members of the LLC before the new member is vested with full ownership rights. Otherwise, the third party receives distributions and benefits from the LLC, but has no management rights.
Full Transfer: Selling Your Texas LLC
There may come a time when you and the other LLC members want to sell your entire business to another party. Determine whether the buyer wants to buy the whole LLC or just the assets of the business. Your OA could require consent from every LLC member prior to authorizing the sale of the whole company. If that’s the case, you have to obtain approval from each LLC member before selling the business. It’s best for the sale procedure to be thoroughly documented in the LLC’s Operating Agreement.
After you’ve consulted your OA and followed its procedure for transferring the LLC to a third party, you can draft a buy-sell agreement with the purchaser.
Keep in mind that selling an entire entity can be a complicated process for business owners. So it’s a good idea to consult with a licensed Texas attorney. Your attorney can help ensure the transaction complies with state and federal law.
Other Possible Issues
Many issues can occur that force the transfer of ownership in your LLC. Most of these circumstances can be addressed beforehand in your Operating Agreement.
Death of an LLC Member
If an LLC member dies, their interest in the LLC typically passes to their surviving spouse or heirs, depending on the member’s estate plan. The individual who receives the interest, known as the transferee, doesn’t have the same rights as the deceased member had. The transferee is entitled to receive the deceased member’s percentage of profits and other LLC benefits, but they aren’t entitled to participate in managing the company. Remaining members often use a buyout provision in these circumstances to purchase the transferee’s LLC interest and distribute it equally between the remaining members.
Dissolution and Reformation
In some cases, transferring partial ownership interests in an LLC is more troublesome than simply dissolving the LLC and forming a new one. If multiple current members of your LLC want to sell their interests, but other individuals want to join the LLC as new members, dissolving your LLC allows you to satisfy all of those requests at one time.
File proper change of ownership paperwork in Texas
Texas requires LLCs to state the governing authority of the business on the Certificate of Formation. For member-managed LLCs, the form requires the names and addresses of initial LLC members. Texas provides LLC members two options for updating the management information of the LLC. First, the LLC members can file an amendment to the Certificate of Organization reflecting the updated management information. Alternatively, Texas requires LLCs to submit a Public Information Report annually to the Texas Comptroller of Public Accounts. The update in management can be reflected in this report.
Use ZenBusiness tools to help prepare your Texas LLC for the future
Ownership interest transfers in a Texas LLC can seem troublesome, but a well-drafted Operating Agreement can make the process straightforward. If you’re forming an LLC, need a new Operating Agreement, or are looking for help with legal compliance, ZenBusiness is here to help. Take a look at our full slate of products and services to see what ways we can assist you.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
- Can I sell my interest in a Texas LLC?
Yes, you can. A well-drafted Operating Agreement outlines the process for selling your LLC interest. Without an OA, all members must agree to a sale or transfer.
- Can an LLC issue new membership interests?
Unless prohibited by the OA, LLCs can issue new membership interests with the consent of all members of the LLC.
- How do I change ownership of an LLC with the IRS?
The IRS requires LLCs to be classified as either corporations, partnerships, or sole proprietorships, as it doesn’t recognize an LLC as a business entity. So if you sell your entire LLC, file a Form 8822-B, Change of Address or Responsible Party – Business, with the IRS within 60 days of the sale. This form reflects that another party is now responsible for the business and its tax obligations.
- Can an LLC member have no ownership interest?
No. Membership status in an LLC creates ownership interest. Someone can transfer the right to receive distributions in a transfer, but full membership creates both an ownership interest and the right to help decide how the LLC is run.