Form a Texas LLC Business- Choosing Your Initial Members

 

Before you form a Texas LLC, it is important that you identify the initial owners of the Texas limited liability company.  Owners are called "Members."  Deciding on who will be Members of your business is very much like choosing who will be your spouse in marriage.

Disputes, disagreements and misunderstandings between members are the most common problems faced by LLC business.  The smart business owner plans properly from the beginning to best minimize these risks.  There are three things you should focus on when choosing members for your LLC.

If any of the three cause you concern, you should think twice before admitting the contemplated person as a member of your Texas limited liability company.

 

MUST KNOW AND SHARE YOUR BUSINESS MODEL AND VISION

You need to confirm that each Member is a person you can have a business relationship with for a long time and that he or she understands and supports your business model, vision and mission.

For example, if you plan on building a lifestyle business which will provide a nice income for you and your other members but one member envisions raising a lot of money and building an empire business which will require a lot of investment and little cash flow in the first 10 years, this will not work.

If the contemplated LLC is your business, have a business plan, show it to your members and make sure they understand and approve the objectives and contemplated plans. The last thing you want is a member who disagrees with the actions and growth plans of the business.

 

DUE DILIGENCE IS NECESSARY

A little due diligence goes a long way when it comes to finding the right partners for your business.  Having no partners is much better than having the wrong partners.

Find out if the member has had experienced as a partner in business before.  If not, then you need to be sure that all expectations are clearly discussed and agreed to.

Call both business and personal references and get comfortable this is a kind of person you can work with in both good times and bad.  Small business is wonderful but it is ever changing and full of challenges.

 

AGREE UPON AND DOCUMENT MEMBER RIGHTS

When you form a Texas LLC, you may know what a member gets when he or she becomes a part of your business, but the member may have a different understanding about the rights a member is entitled to.

You do not want to hope that everybody is on the same page and make sure that each member knows exactly what rights he gets and what limitations may be involved.  This matter is typically in the Texas LLC Operating Agreement. 

Always have a member review the Operating Agreement for your Texas limited liability company before admitting the person as a member. He or she should sign the agreement or another document agreeing to the provisions of the LLC Operating Agreement.

 

DOCUMENT MEMBER OBLIGATIONS

Even more important than communicating member rights is agreeing upon and documenting a member's obligations to the Texas limited liability company.  Typically a member is required to contribute a certain sum of money as capital to the Texas LLC.  This is known as a capital contribution.

With capital contributions, document the amount and do not issue the membership interest until the amount has been paid to the business. In some cases, a member is required to transfer property other than money.  Same rules apply. Document exactly what is being transferred in exchange for an ownership interest and do not issue the interest until the property has been completely assigned and delivered to the Texas LLC.

With many small businesses, there is an expectation that a member will contribute services and efforts on behalf of the Texas limited liability company business.  The most common dispute arises when a member does not end up living up to this but there was never anything in writing about thee obligations.

When a membership interest is issued to a member, it cannot be taken back or forfeited unless there is a specific contract which provides details for a repurchase or forfeiture.  If services are a required obligation of a member, you must have a written services agreement outlining the required services AND you must have written provisions dealing with what should happen if he does not provide such services.

The key thing here is that these details need to be in writing and the writing must be signed by the Texas LLC and the involved member.  This is one area where a good attorney can help you.  Misunderstandings and disputes in this area have been known to cause total business failures.

 

 TEXAS LLC REQUIREMENT FOR INITIAL MEMBERS

Unlike most states, Texas requires that the names and addresses of the initial members of a member managed Texas limited liability company be disclosed on the formation documents and is a matter of public record.   If the Texas LLC is manager managed, the initial manager name and address must be disclosed.

Before your form a Texas LLC, determine who your initial members will be and when they will become members of your Texas limited liability company.

 

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