How to Change LLC Ownership in Texas

Diluting Membership Interest

One of the most significant concerns when issuing new membership interest units in an LLC is the potential for dilution of membership interest. Dilution occurs when the issuance of new units alters the ownership percentages. The extent of dilution relies on the number of units issued.

For instance, let's assume that a company has 99 outstanding membership units equally owned (33 units each) by three members: Bob, Sally, and Tom. If the company issues a single new unit to Sam, the ownership interest of Bob, Sally, and Tom would decrease from 33.33% to 33%, a relatively minor reduction. However, if Sam is issued 33 units, then Bob, Sally, and Tom's interest would reduce to 25%, which is a much more substantial change.

Control of the Company

Another potential issue is a change in control of the company. The transfer of membership interest could significantly impact who manages the company.

Suppose Bob, Sally, and Tom each hold a 33% ownership interest in the company, as in the previous example. In that case, if Bob sells all of his interest in Newco to Cheatham, Cheatham would own 66% of the company, becoming the majority owner. This change in power dynamics could have significant consequences and give Cheatham the ability to exclude Howe from making any meaningful decisions regarding Newco.