People enter into business together to realize a common vision based on a common interest.
The belief in success and hope in the future often overrides all other concerns and seems to be the salve for all potential disagreements. However, those days frequently come to an end and discord arises between business partners.
Conflict arises most frequently from disagreements on future course, a failure to uphold obligations and duties, or one business partner acting in bad faith to harm the business. At that point, you may be faced with the problem of how to remove a member from an LLC in Texas. In this guide, we will go over your options and discuss them in light of Texas LLC law.
Texas LLC Law on LLC Member Withdrawal or Expulsion
Under Texas law, a member of an LLC may neither voluntarily withdraw nor be expelled from a Texas LLC. However, an agreement can modify this statutory default prohibition.
Unless your LLC operating agreement has a provision for withdrawal or expulsion, there are only two mainstream options available for removing a member from an LLC. The first is voluntary dissolution and the second is judicial dissolution.
Voluntary dissolution requires a majority vote of the members. Involuntary dissolution requires a court order. Authorities in Texas have noted that this creates a significant conundrum if there is no operating agreement or any other agreement between the members of the LLC. This is one important reason, among many others, to prepare a written operating agreement for your LLC.
An experienced business formation attorney in Texas can help you craft an agreement that meets the specific needs of your business.
Look to the Operating Agreement
Most LLCs have an operating agreement that governs the internal and external affairs of the business. Within that agreement are almost always provisions for how to remove someone from an LLC, whether voluntary or involuntary. The provision will outline:
- Notice requirements—how much time you need to give for the removal;
- Voting requirements—the needed votes to remove a member;
- Valuation methods—how to value the member’s ownership interest; and
- Payment—the terms of payment for the ownership provision.
By following the provisions of the operating agreement, you may be able to effectively and legally remove the troublesome member from the LLC. Note that this type of removal provision overrides the prohibitions of membership withdrawal and expulsion under Texas law.
Secondary LLC Membership Agreements
Frequently, to supplement a basic (or form) LLC operating agreement, the members elect to enter into a secondary agreement such as a buy-out agreement or an employment agreement. Under each of these agreements there may be similar provisions as discussed above that outline how to remove a partner from an LLC.
Often such a buy-out is described as a “call” option. A call means that the non-exiting member or business unilaterally buys the interest of another member and forces them out of the business. Note that the non-acting member cannot prevent a call (this point is extremely important).
A Third Way
If there is no operating agreement or secondary membership agreements, and you do not want to dissolve the LLC to remove your troublesome business partner, a third option is to presently adopt an operating agreement with the appropriate removal/buy-out provisions.
However, the ability to do this relies on the willingness of your business partner (if they are the only other member of the LLC other than you) or a majority of the members (if there are more than just the two of you—e.g., three or more).
In that event, Texas law allows you to adopt an operating agreement through a majority vote. That operating agreement can then have the proper buy-out provisions. On the other hand, you could adopt a stand alone buy-out agreement to achieve the same purpose.
Hunnicutt Law Group Can Untangle the Knot
If you are stuck without an operating agreement or any secondary agreements and are struggling with how to remove a member from an LLC in Texas, contact us.
The Hunnicutt Law Group, through decades of small business legal counsel, has resolved hundreds of business disputes outside of litigation. With our creative and keen attorneys, we can help you find a way forward.
Texas law is very unusual because it does not allow an LLC member to withdraw from an LLC without an agreement. Less skilled attorneys would give up and just “live with it.” However, we believe creative legal practice can provide options when none seem apparent. Call us today to learn more about how we can help you and your business.