How to Transfer a Texas LLC Interest to a New Owner

The Texas LLC law calls an owner of an LLC a member.1 Financial rights in a Texas company—such as the right to receive distributions and share in profits and losses—is called a membership interest.2 A person’s status as a member of an LLC and the economic rights that come with a membership interest are distinct. Membership status lets the member participate in management and direct the affairs of a member-managed LLC.3 A membership interest is economic and is treated like personal property of the interest holder.4

Under Texas law, member status and a membership interest can be separated. That means a person can be admitted as a member without acquiring a membership interest, and vice versa.5 The Texas rules for transferring ownership of a Texas LLC focus mainly on transfers of membership interests. Transfers of member status are possible, but the rules are more strict to protect the company and other members.

The Texas rules for transfers of membership interests are default rules. In most cases, members can change the rules about transfers in their company agreement—the Texas equivalent of an operating agreement governing an LLC’s internal affairs.6 Creating an operating agreement when forming a Texas LLC lets the business owners tailor the transfer terms to the nature of the company and the owners’ long-term goals.

How Does a Business Owner Transfer an Interest in a Texas LLC?

The default rule in Texas is that a person who holds a membership interest in a Texas LLC can transfer (or assign) the interest in whole or in part.7 The person who receives a transferred membership interest (the assignee) obtains whatever economic rights in the LLC are held by the person who makes the transfer (the assignor)—such as the right to receive distributions and to share in the LLC’s profits and losses.8

The assignee does not automatically acquire member status or a right to vote or participate in the company’s management.9 The assignee must be first admitted as a member of the LLC before he or she receives the transferor’s voting rights and power to participate in management.10 The assignee becomes a member—and receives the assignor’s rights and powers as a member—only after all existing members approve and consent to the assignee’s admission as a member.11 Until the assignee is actually admitted as a member, the assignor retains his or her member status and rights—even though the assignee now holds the economic rights that come with the membership interest.12

By requiring other members’ approval before an assignee officially becomes a member, this rule protects the business owners and the company itself from losing control of the business’s management to an assignee who is unfamiliar with the business.

What Happens to a Texas LLC Interest When a Member Gets Divorced or Dies?

A membership interest in a Texas LLC is considered personal property that can qualify as community property.13 The status as a member—and the rights that come with it—cannot qualify as community property. An owner’s former spouse may acquire the owner’s economic rights in a Texas LLC in connection with a divorce. But an ex-spouse who receives a membership interest is treated as an assignee and does not receive the owner’s voting rights or right to manage the LLC.14 The former spouse can participate in the company’s management only if the members consent to his or her admission as a member or if the ex-spouse was a member of the LLC already.

Along the same lines, a deceased member’s heir or devisee can inherit a membership interest in an LLC—but only as an assignee.15 The heir receives the deceased owner’s economic interest but does not acquire member status unless agreed by other members.

LLC members sometimes create a special type of member agreement—called a buy-sell agreement—that decides in advance what will happen if a member dies, divorces, or wishes to withdraw from the company.16 Buy-sell agreements may give an LLC’s other members a right to purchase a departing member’s interest before the interest can be transferred to a third-party—including a transfer due to death or divorce. Rules for when and how an LLC interest can be transferred and other members’ purchase rights are built into a company’s operating agreement in some cases.

What if a Deceased Owner is the LLC’s Only Member?

Texas law generally requires an LLC to have at least one member.17 However, there are limited exceptions for manager-managed LLCs after their initial formation or for an LLC whose last remaining member’s membership status has terminated—such as due to death. In the latter case, a deceased member’s heir or executor has up to 90 days to decide to continue the business and to either become a member or to designate another person to become a member.

Can an LLC Owner’s Creditors Attach an Interest in a Texas LLC?

Texas law allows a creditor who has a judgment against an LLC owner to attach the owner’s membership interest by obtaining a specific type of court order called a charging order.18 A creditor who obtains a charging order receives the owner’s right to distributions from the LLC that the owner would receive through the membership interest. A charging order does not give the creditor rights as a member.

A charging order is essentially a lien and is the only means of attaching an LLC interest permitted under Texas law. A creditor who obtains a charging order cannot force a sale of the business or the attached membership interest and cannot attach property owned by the company.

Can a Texas LLC Member Be Expelled or Voluntarily Withdraw from the Company?

The default LLC rules in Texas do not allow an LLC member to voluntarily withdraw and do not let other members expel a member.19 LLC members can (and often do) include rules for either situation in their company agreements. An agreement might, for example, allow expulsion for cause and establish rules for withdrawal designed to protect other members without tying a member to a company in perpetuity.

Operating agreement provisions governing expulsion and withdrawal should address the distinction between member status and the economic rights of a membership interest under Texas law. Distinguishing between the two—and defining situations they can and cannot be separated—helps business owners work out an agreement that protects the members, the company, and the financial rights of owners and their families.

  1. Tex. Bus. Org. Code § 1.002(53).
  2. Tex. Bus. Org. Code § 1.002(54).
  3. Tex. Bus. Org. Code § 3.101.
  4. Tex. Bus. Org. Code § 101.106.
  5. Tex. Bus. Org. Code § 101.102(c).
  6. Tex. Bus. Org. Code § 101.052.
  7. Tex. Bus. Org. Code § 101.108(a).
  8. Tex. Bus. Org. Code § 101.109(a).
  9. Tex. Bus. Org. Code § 101.108(b).
  10. Tex. Bus. Org. Code § 101.110.
  11. Tex. Bus. Org. Code § 101.103(c).
  12. Tex. Bus. Org. Code § 101.111.
  13. Tex. Bus. Org. Code § 101.106.
  14. Tex. Bus. Org. Code § 101.1115(a)(1).
  15. Tex. Bus. Org. Code § 101.1115(a)(2).
  16. See Tex. Bus. Org. Code § 101.1115(c).
  17. Tex. Bus. Org. Code § 101.101.
  18. Tex. Bus. Org. Code § 101.112.
  19. Tex. Bus. Org. Code § 101.107.