How to Add Owners to a Texas LLC

Limited liability companies registered in the Lone Star State must file articles of organization (certificate of formation) with the Texas Secretary of State. When changing an LLC’s ownership structure, an amendment is not required; if a manager is added to an LLC, it does have to file an amendment.

When adding a new member, an LLC’s operating agreement may have provisions addressing the process, but this is also not required. If the LLC does not have a provision in its operating agreement, then Texas law dictates the process for adding a new member.

In Texas, applicants form a limited liability company (LLC) with the Texas Secretary of State, whose office provides a form for them to meet minimum state law requirements when creating articles of organization (known as a certificate of formation.)

An LLC is not a partnership or a corporation, but an entity that has powers of both. A limited liability company has more formal requirements than a partnership, where the individual partner is the key element.

The owners of an LLC can be a corporation, individual, partnership, trust or another commercial or legal entity. A member’s liability is limited to their investment, but they enjoy the same pass-through tax treatment of those in a partnership.

Managers or members can manage an LLC, but the management structure must be stated in its articles of organization. The Texas Secretary of State does not give management structure advice to the LLC or its members. There are several steps to take when forming an LLC in Texas.

Texas does not require an LLC to have an operating agreement, but it should have one nonetheless. This internal document establishes how the LLC is run and puts in place the rights and responsibilities of the managers and members. An operation agreement can help show that an LLC is a separate business entity.

An operating agreement should include certain information:

• Ownership percentage interests in the LLC.
• Rights and responsibilities of its members.
• Voting powers of its members.
• Allocation of profits and losses.
• Information about meetings and vote-taking rules.
  
• Buyout provisions, such as what happens when a member dies, becomes disabled or wants to sell their share in the LLC).

An LLC does not have to file an annual report with the secretary of state. However, it must file franchise tax reports every year.

When adding a new member, it’s important to check the LLC’s operating agreement, as there may be provisions addressing the process. If there is no provision, then Texas law dictates how the member is to be added.

According to Texas Business Organizations Code Section 101.105, adding a new member is possible only with the approval of the current members. Adding a member to an LLC in Texas involves amending its articles of organization with the new member's information.

The Texas Secretary of State does not require an amendment if there is a change of ownership of an LLC. However, if there is a change in management, the LLC must file management changes with the secretary of state’s office either by a yearly update to the management information on the LLC’s Public Information Report or through filing an amendment to update management information.

Through either of these options, the LLC’s management information will be updated in the secretary of state’s records. A new manager will also require an LLC to update its operating agreement, if it has one. As the Lone Star State requires all management names and addresses in an LLC’s articles of organization, it must file an amendment with the secretary of state.

When updating a certificate of formation, the LLC’s owners will pay a fee of $150 to file a Certificate of Amendment (Form 424). On the form, under Section 3 (Other Provisions to be Added, Altered or Deleted), the names of the new LLC members can be added. This form is for name changes only.

The applicant must submit the form in duplicate by mail to: Texas Secretary of State, P.O. Box 13697, Austin, TX 78711-3697, or take it in person to the James Earl Rudder Office Building, 1019 Brazos St., Austin, TX 78701. Applicants can also fax the form to 512-463-5709.

An SMLLC is a single-member LLC and is created in much the same way as a multi-member LLC. The process for adding a new member is also the same. Once an SMLLC adds a new member, it becomes a multi-member LLC.

Adding a member changes the tax status of the SMLLC, as the business changes from a sole proprietorship to a partnership. How taxes are reported to the IRS also changes – the owner may now be required to obtain an EIN. When changing from an SMLLC to a multi-member LLC, consulting a CPA or business attorney may be helpful.

A party interested in forming an LLC in Texas should look for a name that is distinguishable from other business entities already registered with the Texas Secretary of State. A business owner can check for available names at the secretary of state’s website, SOSDirect.

According to Texas law, an LLC’s name must contain one of these terms:

• Limited Liability Company.
• Limited Company.
• Ltd. Company.
• Ltd. Co..
• L.L.C.
• LLC.
• LC.
• L.C.

To reserve a name, applicants will pay a fee of $40 to file an Application for Reservation or Renewal of Reservation of an Entity Name (Form 501) with the Texas Secretary of State online or via mail. Business owners can uses a fictitious business name, DBA (doing business as), or an assumed or trade name.

When filing under an assumed name, applicants will pay a fee of $25 and use an Assumed Name Certificate (Form 503) filed with the secretary of state’s office and the county clerk in the location of the business.

All Texas LLCs must have a registered agent to accept legal papers on the LLC’s behalf. An agent can be an individual or a business entity that represents the LLC.

A registered agent may be a resident of Texas or a business entity that is authorized to do business in the Lone Star State. No matter who the agent is, they must have a physical street address in the state.

An applicant will file a Certificate of Formation for a Limited Liability Company (Form 205) with the Texas Secretary of State’s SOS Direct site or through the mail. The filing fee for a certificate of formation is $300.

It must include this information:

• Name of LLC with suffix.
• Name and address of registered agent.
• Information on whether the LLC is manager-managed (with names and addresses of each initial manager) or member-managed (with names and addresses of each initial member).
• General purpose clause.
• LLC organizer’s name and address.
• Certificate’s effective date.
• Organizer’s signature.

All members of a member-managed LLC take part in the LLC’s management. Members retain their ownership interest in a manager-managed LLC, but give up their management responsibilities and power to managers who are not required to be members of the LLC.

If an LLC has multiple members, it must have an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) even if it has no employees. A one-member LLC (SMLLC) only needs an EIN if it has employees or if the owner wishes to have it taxed as a corporation and not a sole proprietorship.

An LLC can get this number by completing the IRS’s EIN application. An EIN is free.

Transferring ownership of an LLC can be partial or total through a sale. An LLC member can sell their membership interest to the entity’s remaining members, which is then distributed equally among those members. The execution of a buyout occurs when the remaining members and the departing member enter into a buy/sell agreement that includes:

• Value of each LLC member’s interest.
• Method used to determine the value.
• Whether leaving member can force a buyout.
• Whether existing members who remain have the right of first refusal.

The buy/sell agreement terms are addressed in the operating agreement. For a member to sell their LLC interest to a third party, approval is needed from all members of the LLC. The new member cannot have full ownership rights without it.

If the members do not approve, the third party has the right to benefits and distributions of the business, but has no management rights.

LLC members who want to sell the business should first determine if a buyer wants the whole LLC or just its assets. The business operation agreement may require consent from all members for the sale. After consulting the operating agreement, the seller can draft a buy/sell agreement with buyer.

If more than one current member of the LLC want to sell their interests, but others want to join as new members, dissolution of an LLC and a subsequent restructuring will satisfy these issues all at once.

If a member dies, their interest in the organization usually passes to survivors, such as a spouse or children. This depends on the member’s estate plan. The person who receives the deceased’s interest in the LLC will not have the same rights as the deceased.

The transferee will receive the decedent’s ownership percentage and other benefits, but they can’t take part in managing the LLC. Remaining members of the organization typically use the buyout provision to buy the transferee’s interest in the business and distribute it equally among the other members.