If your LLC has more than one member, it is crucial to have a well-drafted company agreement. This is true even if the multiple members are related (i.e. siblings, husband-wife). The company agreement will provide additional protections for the members which can modify the statutory scheme under the Texas Business Organizations Code (“BOC”). The Texas BOC specifically provides language which states a company agreement can modify many of the statutory provisions.
Key Provisions for Members under the BOC
The BOC contains a number of provisions which define member rights and obligations.
A few of the key provisions are below:
- Membership is personal property (Section 101.106(a)). As personal property, it is nearly impossible to divest a person of personal property absent a legal proceeding (i.e. divorce) or an agreement otherwise (i.e. the company agreement).
- A member does not have an interest in specific property of the LLC (Section 101.106(b)). If the LLC owns something – like real property, equipment, or intellectual property – the individual members do NOT own it.
- A member may not withdraw or be expelled from the company (Section 101.107). Imagine one of your partners in the business gets convicted of a heinous crime. If you do not alter this provision of the BOC through a company agreement, you CANNOT leave the company or force the partner to sell his/her units of the company.
Transfer of Member Interest
As personal property, membership units are relatively easy to transfer. However, the BOC places some restrictions on the rights of a “transferee” member. For example, the person who is assigned the interest in the LLC is not automatically a member of the LLC nor are they entitled to participate in management of the LLC or exercise membership rights. The remaining members may accept the new assignee as a full member, but it requires a vote of approval. A well-written company agreement will provide for the transition of member interests. Typically, clauses such a “right of first refusal” rights are included. In a right of first refusal, the remaining members have the right to match the purchase price of the selling member’s interest rather than selling to a third-party.