[TX] Can I set up an LLC so my friend is not a co-owner but receiving co-owner benefits?

Lexi, Chatbot

I understand you're looking to register an LLC with one name but have co-owners. Are you looking for guidance on the process of registering the LLC with multiple owners?

Lexi, Chatbot

Are you also interested in understanding the legal implications and responsibilities that come with having co-owners in an LLC?

Lexi, Chatbot

Is there anything else the corporate lawyer should know before I connect you? Rest assured they'll be able to help with LLC ownership structure.

Andres Sanchez

Hello, my name is Andres Sanchez and I have 20 years of experience. Could you tell me what state you are in?

Andres Sanchez

Yes, in Texas, you can initially form an LLC with yourself as the sole member and later bring in co-owners by updating the operating agreement to reflect a multi-member structure. This approach allows flexibility in ownership and management while maintaining compliance with Texas law.

Steps to Transition from a Single-Member to a Multi-Member LLC in Texas:

1. Form the LLC with a Single Member: When you file the Certificate of Formation with the Texas Secretary of State, you can list yourself as the sole member.
2. Draft an Initial Operating Agreement: Even though it's not legally required, having a single-member operating agreement is advisable. It outlines the company's operations and affirms your sole ownership at the outset.
3. Amend the Operating Agreement to Include Additional Members: When you're ready to add co-owners, update the operating agreement to reflect the new members, their ownership percentages, capital contributions, and roles within the company. This amended agreement should be signed by all members to be effective.
4. Issue Membership Interests: According to the Texas Business Organizations Code, new members can be admitted by issuing membership interests, provided all existing members approve.
5. Update Company Records: Ensure that all internal records, including the amended operating agreement and any membership certificates, accurately reflect the changes in ownership.

Andres Sanchez

I still haven’t received clarity really — kinda gonna shoot with you straight. In Texas I know if it’s a veteran-owned I’m exempt from taxes for five years on the company. I want to start this business with a friend and legally don’t want him getting f**ked over and would want him to be covered. For the options — is there like a way to technically set it up where he’s on paper not a co-owner but receiving benefits like a co-owner? You mention performance-based — are there just certain ways of wording the document that could keep the business legally compliant for the veteran owned? Can you kind of elaborate a little more on how the options provided?

Andres Sanchez

Absolutely — I appreciate the straight talk, so let me shoot it to you equally straight:

Your Goal:

• Register as a 100% veteran-owned business in Texas (to lock in the 5-year franchise tax exemption & other benefits),
• Still cut in your friend as a legitimate, protected business partner — without technically listing them as a co-owner on formation docs,
• Stay legally compliant and not risk tax-exempt status or certification.

Andres Sanchez

Yes, you can structure it that way.

What you’re describing is totally doable, and often done through:

1. Single-Member LLC (You’re the only listed owner)

• File the LLC with only your name as sole member
• Apply for the veteran-owned exemption (Form AP-204)
  • See: Texas Tax Code §171.0005
• Locks in the 5-year franchise tax exemption and Veteran-Owned Business (VOB) status

2. Operating Agreement – With a “Silent Partner” or “Profit-Sharing Manager”

• You create a custom Operating Agreement (not filed with the state) that:
  • Lists you as sole member (100% veteran-owned)
  • Grants your friend a non-equity economic interest (they get a share of profits)
  • Gives your friend a management title (COO, VP, etc.)
  • Limits your friend’s decision-making to your consent only — you retain control

Key Legal Terms to Use:

• Use: “Independent Contractor” or “Manager” — NOT “partner” or “co-owner”
• Use: “Discretionary bonus based on company profits”
• Use: “Profit Participation Agreement”
• Consider: “Phantom Equity” or “Equity-like Bonus” (non-voting, non-member)

This lets you give them:

• 10%, 20%, whatever % of net profits
• Decision-making power in daily operations (if you want)
• Contractual guarantees on pay/involvement
• BUT NOT equity or member status

What NOT to Do:

• Don’t file anything with the state listing them as a member or owner
• Don’t transfer or assign “membership interest”
• Don’t give them veto power or final say over material decisions
• Don’t structure payment like they’re a hidden equity owner

You’ll Need to Draft:

• Operating Agreement – reflects your ownership and defines your friend’s role
• Profit Sharing / Bonus Agreement – separate doc defining compensation
• Independent Contractor or Employment Agreement – if they’ll be active

Sample Language (simplified):

• Section 5.2 – Non-Equity Management Role

The Member may appoint individuals to serve in managerial roles. Such persons shall not be deemed Members or Owners, and shall have no voting or equity interest in the Company.

• Section 6.3 – Profit Participation Agreement

[Friend's Name] shall be entitled to receive an annual discretionary bonus equal to 20% of net profits as calculated by the Member. This arrangement is contractual and does not confer ownership or membership rights.

• Section 9.1 – Ownership and Control

[Your Name], the sole Member, retains exclusive control over all material decisions, voting rights, and ownership interest in the Company.

Andres Sanchez

Do you have any other questions?