Texas limited liability companies (LLCs) have become a very popular structure for new businesses for many reasons. The owners of an LLC, called members, do not face personal liability for the debts of the LLC, including debts resulting from lawsuits against the LLC. The LLC requires an initial filing with the State of Texas, but has minimal formalities in the way the LLC is to be managed. Although not required by the State of Texas, often, the LLC is managed with an Operating Agreement that lays out the LLC policies and procedures. Finally, for federal tax purposes, the LLC can be taxed as a sole proprietorship, partnership or S-Corporation which allows for pass through taxation, not adding a second layer of taxation to the business.
LLCs are formed by filing the requisite documents with the Texas Secretary of State and drafting an Operating Agreement which acts as the LLC's governing document. With hope, the business becomes successful and grows. At times, original members of an LLC may become interested in adding new members, either to assist in the operations or to contribute additional capital to enable the continued growth of the business. Because LLCs in Texas are flexible, amending the Operating Agreement is fairly straightforward. However, when the operation and ownership of a business changes from one owner to several, issues can arise. Anticipating some of those issues and outlining their resolution in advance in the governing documents will benefit all future members.
Something to think about is what may happen when a member of the LLC dies. Members of a business often want to ensure that the ownership of the LLC remains with the original members and not an heir, or even multiple heirs, who may not have knowledge of the business or may be difficult to work with when making decisions on behalf of the business. The Operating Agreement can be amended to include provisions to deal with this scenario in advance. For example, the Operating Agreement may state that in the event of the death of one of the members, the other members of the LLC have the opportunity to purchase the deceased member’s interest. The Agreement may include a timeframe, such as 60 or 90 days, whereby the surviving members can decide whether to purchase the interest, and if they choose not to, the LLC will then be obligated to purchase the interest. Often, this provision will be linked to a section in the Agreement that outlines how to determine fair market value of the interest. Similar provisions can be included in the event of a member’s bankruptcy.
Going from a sole member-managed LLC to an LLC managed by multiple members could also require amending the Operating Agreement to ensure that all members are clear in decision making processes. For example, does every member have a right to bind the LLC to contracts and obligations? Will every member be able to transact general business on behalf of the LLC? In either the case of a sole member LLC or an LLC that is made up of multiple members, the members may choose to hire a manager to manage the business of the LLC or they may manage the LLC as members themselves.
Additionally, members must decide how important decisions, such as adding a new member or dissolving the business, will be handled. Members may prioritize their relationships with other members and may want to institute a supermajority vote to add a new member. The Operating Agreement may require a “supermajority” vote for certain votes, such as needing 70-80% of the membership interests to ratify certain decisions. Likewise, the Operating Agreement may also be drafted such that the day-to-day operations are left to a simple majority of the members or left to the manager without requiring votes from the other members.
If you own a Texas LLC and you wish to add members, an experienced business attorney can help you identify any potential issues with adding those members to the LLC, answer questions, and allow you to act on an informed basis with respect to your business.
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