How to Withdraw From or Dissolve an LLC in Texas
How to Withdraw From or Dissolve an LLC in TexasLike any business enterprise, LLC ownership, called membership, can change over the course of its existence or members may choose to dissolve the business for various reasons. While withdrawing from the LLC will leave it in the hands of the remaining or new members, dissolving it will officially end its existence altogether. Whether the business is no longer profitable or you are simply choosing to remove yourself for personal reasons, withdrawing from or dissolving an LLC in Texas requires some essential procedural housekeeping, asset liquidation, and notifications to any remaining members, interested parties, and financial institutions.
The Texas Business Organizations CodeUnlike many other states, there is not a law exclusive to LLCs in Texas. The Texas Business Organizations Code governs all business structures in the state. Whether you are withdrawing from an LLC in Texas or dissolving one, it is critical that these things are done within the bounds of state procedures. Getting the guidance of an experienced San Antonio business lawyer ensures that you are withdrawing from or dissolving your Texas LLC properly.
Consulting Your Operating AgreementIf you decide to withdraw from an LLC in Texas, the first place you will want to consult is your operating agreement that was developed when the LLC was first established. During the formation of an LLC, most operating agreements will set out procedures for a member’s withdrawal, buy-out, or any other type of separation. These procedures will supersede any default procedures. The terms of your operating agreement will give you guidance on how to handle the withdrawal and your shares of the company. If your operating agreement makes no provision for that, you can ask the remaining members to amend the agreement, or you can follow the default set of procedures for the state of Texas.
How LLC Membership Withdrawals Typically WorkTo withdraw your membership or transfer your existing shares, your operating agreement will determine how a withdrawal must happen and how shares of an outgoing member must be distributed. The agreement may only require that you notify the other members of your intentions via a letter of resignation, but it may place additional restrictions on your withdrawal. If the terms of the agreement are violated, you may be in breach and forced to pay damages to the other members. When you are considering withdrawing from an LLC, there are two methods available to you. You can
- Transfer your portion of the membership
- Sell your portion of the membership
What Happens to Shares in a Membership Withdrawal?The LLC’s operating agreement should have a buy-out agreement that sets out how an outgoing member’s shares should be distributed. Shares of an LLC will typically be distributed similarly to the membership. They can be sold, transferred to another member, or taken in the form of income or assets. If the operating agreement makes no provision for the distribution of shares at withdrawal, you can ask the remaining membership to vote on an amendment to add a preferred option, or you can follow the Texas default procedure.
What Happens if a Member Has Died or Become Incapacitated?An operating agreement should always have language providing for the death or incapacitation of a member. The operating agreement will determine whether the LLC will only exist for the duration of an individual’s life or survive it. Depending on the agreement, shares may be distributed to the remaining membership or become part of that individual’s estate. In the state of Texas, if the last remaining member of an LLC dies, it doesn’t necessarily mean that it must dissolve. An LLC is considered personal property of the members. If the last member dies and that member is married, that membership may be considered community property unless the agreement states otherwise. If it is unstated in the documents, the membership may be assignable by the surviving spouse or other successor(s).
Do I Need to Report a Change in Membership With the State?Whether you are required to file a change of membership with the state will depend on how the LLC is managed. If the LLC has managers, any change in management must be made with the Secretary of State through the annual update on the Public Information Report or by filing an amendment to update the management information.
What If I Want to Dissolve the LLC?Dissolving an LLC in Texas requires keeping consistent with the operating agreement, the same as a withdrawal. An operating agreement will typically set out triggering events that must happen for an LLC to be dissolved and how the dissolution will happen. The triggering event may just be that the membership voluntarily agrees to dissolve the LLC, but the operating agreement will determine what it is and how this must be done. If there is no provision in the operating agreement, the Texas Business Organizations Code provides for essential winding up tasks that must be completed before an LLC can be dissolved. These include:
- Notice of the intention to dissolve the LLC to any claimants
- Dealing with any lawsuits against the LLC or any in which the LLC is considered a plaintiff
- Selling any property owned by the LLC or distributing it to the members
- Properly handling any of the LLC’s outstanding obligations or liabilities
- Notifying financial institutions and closing accounts in the name of the LLC
- Paying all taxes of the LLC’s