Businesses change over time. It is very rare for the ownership of a company to remain the same over a long period of time, especially when there are multiple owners.
Still, many business owners are unsure of how to change the ownership percentage of an LLC in Texas.
In this article, we will discuss how to change the ownership of an LLC and what issues to be aware of when doing so.
While this article is educational, it is not legal advice. Please consult a business law attorney before you change LLC ownership.
Who Owns an LLC?
An LLC is owned by members, similar to shareholders in a corporation. Accordingly, members will own an interest in the LLC by holding a membership interest in the LLC.
Although the LLC will often issue a paper certificate reflecting the ownership, this is not always the case.
Instead, the governing documents of the LLC, usually called a “company agreement,” will typically designate how many membership interest units will be issued by the LLC.
How to Change LLC Ownership in Texas?
Since you’re reading this article, you are likely wondering how to change ownership of an LLC. In Texas, the two primary ways to change LLC ownership are by issuing membership interest units or transferring existing units.
The issuance of membership interest units is done through the LLC itself. As mentioned above, the company agreement will usually designate the initial number of units.
That said, the LLC can usually issue additional units upon approval of the existing members.
The other way to change ownership is by transferring membership interest units. Many transfers are through a purchase agreement, but not all transfers result from sales.
A member may also transfer ownership without a sale agreement. One example is when one spouse transfers their interest to another pursuant to a divorce decree.
Regardless of the method used to change LLC ownership, you will need to ensure the ownership change is allowed under the company agreement.
In addition to provisions about the issuance of new units, the company agreement may also have restrictions on the transfer of membership interest units.
The issuance or transfer of ownership may also require approval by the members or managers of the company.
Changing ownership in an LLC is not without risks. Just because you can change LLC ownership does not always mean you should. Several potential issues could arise when you make an ownership change.
One of the biggest concerns when issuing new membership interest units in an LLC is diluting the membership interest.
Dilution refers to the change in ownership percentages when you issue new units. The degree to which the issuance will dilute interests depends on the number of units issued.
For example, assume Newco currently has 99 outstanding membership units owned equally (33 units each) by three members: Dewey, Cheatham, and Howe.
If Newco were to issue one new share to Steele, then the ownership of Dewey, Cheatham, and Howe would drop from 33.33% to 33%, a reasonably negligible drop.
However, suppose Steele is issued 33 units. Then Dewey, Cheatham, and Howe’s interest would drop to 25%, which is a much more significant change.
Another issue that could arise is a change in control of the company. The transfer of membership interest could substantially affect who runs the company.
Let’s say Dewey, Cheatham, and Howe each own 33% of Newco, similar to the example above. If Dewey sells all his interest in Newco to Cheatham, Cheatham will own 66% of the company, making him the majority owner.
This is a significant shift in power dynamics, and it could allow Cheatham to remove Howe from any meaningful decision-making concerning Newco.
An additional concern is if the company agreement has a push-pull provision.
In essence, push-pull provisions state that when one member offers to buy out another member, other members can accept the offer or even choose to purchase the offering member’s units for the same price as was proposed.
While many people like having this language in the agreement, it’s essential to understand its effect if you consider making an offer for another member’s interest in the company.
Contact a Business Attorney Today
If you are wondering how to change ownership percentage of an LLC in Texas, then it is a good idea to talk to an experienced business law attorney.
Ownership changes can have serious ramifications. Using the right attorney could help prevent unwanted issues due to a change in ownership.
Fortunately, Massingill Attorneys & Counselors at Law has a dedicated and experienced business law team. Our attorneys understand the problems that come with a change in LLC ownership.
We can work with you, so you know what your options are and how they will affect the ownership of your company. Contact us today for your initial consultation.