Membership Interest

A membership interest is the ownership interest of a member in a Texas LLC. The Texas Business Organizations Code treats the membership interest as comprising two analytically separate components: economic rights (the right to receive distributions and allocations of profit and loss) and governance rights (the right to vote on LLC matters, to inspect records, to participate in management in a member-managed LLC, and to exercise other rights specifically reserved to members). This distinction is fundamental to Texas LLC law.

Personal property classification

Under § 101.106(b), a membership interest is personal property. A member or assignee does not have an interest in any specific property of the LLC. § 101.106(a). This classification is significant for:

(1) Estate planning. Membership interests pass under the member's will or by intestacy as personal property, not as real property even if the LLC's principal assets are real estate.

(2) Asset protection. The membership interest is the asset reachable by the member's personal creditors; the LLC's underlying property is not.

(3) Marital property. In Texas community-property analysis, the membership interest (rather than the LLC's underlying assets) is the property characterized as separate or community.

(4) Tax basis. The member's tax basis is in the membership interest, not in the LLC's underlying assets (subject to specific Internal Revenue Code basis rules).

The economic-rights / governance-rights split

Under §§ 101.108–101.110, a member may assign the economic rights associated with the membership interest without automatically transferring the governance rights. The transferee (called an "assignee") receives the right to share in the assigned distributions and allocations, but does not automatically become a member with voting and other governance rights. The assignee becomes a member only if (a) the company agreement provides for automatic admission, or (b) the other members consent to the admission as required by the company agreement.

Charging-order limitation

Under § 101.112, a judgment creditor of a member who obtains a charging order receives only the economic rights, the right to receive distributions when made, but does not become a member, does not have governance rights, and cannot foreclose on the membership interest. This is the principal Texas-distinctive asset-protection feature for membership interests. See Charging Order.

Transfer restrictions

The TBOC's default transfer rules under §§ 101.108–101.110 are routinely modified by the company agreement. Common restrictions include rights of first refusal, mandatory buy-back provisions, transfer prohibitions, and admission-of-assignee restrictions. These are typically among the most important provisions of any Texas LLC company agreement because they determine the member's effective exit options.

Death and other events affecting members

Under § 101.113, on a member's death, the member's personal representative may exercise the member's rights for the purpose of settling the deceased member's estate. The default does not give the personal representative full membership rights, only those necessary for estate administration. The company agreement may, and typically should, address this question explicitly.

Companion article: Raising Capital in Texas

Full entry: Membership Interest