The Tuesday Morning Call
James Okafor had built Meridian Bar & Grille from a concept on a napkin in 2018 to one of Plano's busiest lunch spots by 2023. He and two partners — college friends from UT Dallas — owned the LLC together: James at 40%, Marcus at 35%, and Vincent at 25%. They had a handshake understanding, a stack of agreements their accountant had helped draft, and a plan to open a second location in Frisco by the following spring.
James died of a cardiac event on a Tuesday morning in March 2024. He was fifty-two years old. He had a current will. He had life insurance. He did not have, as it turned out, anything in writing that addressed what happened to his 40% ownership interest in the LLC when he died.
His wife, Adaeze, was a schoolteacher in Plano ISD. She knew the restaurant was profitable — it had supported the family comfortably for years. She knew James's 40% was worth something. What she did not know, and what no one had told James or Adaeze in six years of operating the business, was that under Texas law, the ownership interest she had just inherited did not come with the same rights James had held when he was alive.
She owned the economic interest. She was entitled to her share of profits. She was entitled to receive distributions when the other members voted to make them. But she had no vote. She had no management rights. She could not attend member meetings in any binding capacity, could not approve or veto major business decisions, and could not prevent Marcus and Vincent from taking actions — including, under certain circumstances, dissolution — that she had no legal power to stop.
Adaeze had inherited the financial output of 40% of a restaurant. She had not inherited the seat at the table.
What Most Texas Business Owners Don't Know About LLC Law
The gap Adaeze discovered — between the economic interest she inherited and the governance rights she did not — is built directly into the Texas Business Organizations Code. It is not a loophole or an ambiguity. It is the default statutory rule, and it applies to every Texas LLC unless the operating agreement explicitly says otherwise.
Under Texas Business Organizations Code § 101.107, when a member of a Texas LLC transfers or assigns their membership interest — and a transfer at death operates, for legal purposes, like any other transfer — the transferee receives only what the statute calls the "transferable interest." That means economic rights: the right to receive allocations of profit and loss, and the right to receive distributions. It does not include membership rights: the ability to vote, participate in management, inspect books, or exercise any of the governance powers the original member held.
This rule exists for sensible reasons. The other members of an LLC chose to go into business with a specific person — not with whoever that person's estate happens to pass the interest to. A Texas LLC is, in legal theory, a creature of contract between its members. The underlying rationale is that membership — full membership, with its accompanying governance rights — is personal to the member who earned it. Transferring economic value is one thing; transferring the relationship of trust that underlies business partnership is another.
The problem is that most business owners who form a Texas LLC — especially small operators in McKinney, Frisco, Plano, and across Collin County — never learn this rule until they are sitting in a probate attorney's office after a loved one has died.
The Three Scenarios That Determine What Your Family Inherits
How this plays out depends heavily on the structure of the LLC and the content of its operating agreement. There are three scenarios Texas business attorneys see most frequently.
Scenario One: The Sole-Member LLC. If the deceased member was the only member of the LLC, the transferee — typically the spouse or heirs — inherits the entire membership, economic and governance rights included. There are no other members to dilute her position. The estate's representative takes over management of the LLC through the probate process, and the heirs ultimately receive the full membership interest. This is the most favorable outcome for a family. It is also fragile: a sole-member LLC becomes legally precarious during the period between a member's death and the estate's administration, and if the business has debts, creditors can reach the membership interest through the probate estate in ways they cannot reach assets held in a properly structured trust.
Scenario Two: The Multi-Member LLC With a Thoughtful Operating Agreement. Many Texas LLCs are formed with operating agreements that address member death explicitly. A well-drafted operating agreement might provide that the deceased member's successor — the spouse, the estate, or a named trustee — steps into full membership, with all the governance rights the original member held. Some operating agreements go further, specifying the mechanism by which the interest must be bought out at a formula price, who has the first right to purchase it, and how the purchase will be funded — typically through life insurance policies on each member, held in a cross-purchase or entity-purchase buy-sell arrangement. These provisions don't emerge from a template. They require thought, negotiation, and drafting by a business attorney who understands what the surviving members and the deceased member's family will each need.
Scenario Three: The Multi-Member LLC With No Succession Provision — Or a Generic Template. This is Adaeze's scenario. The statutory default — or worse, a form operating agreement downloaded from a legal website and never customized — leaves the deceased member's family holding an economic interest with no governance backstop. The surviving members are not obligated to include the transferee in management. They are not obligated to explain their decisions. They are not legally required to distribute profits on any particular schedule. And depending on the operating agreement's terms for member buyout, they may have the right to purchase the transferable interest at a formula price that significantly undervalues the business.
What "Economic Interest Only" Actually Means in Practice
The gap between an economic interest and full membership rights is not theoretical. It has practical consequences that unfold quickly after a member's death.
Consider distributions. A Texas LLC must distribute funds when the members vote to do so. If Adaeze holds 40% of the economic interest but has no vote, she cannot force a distribution. If Marcus and Vincent decide to reinvest profits into the Frisco expansion — paying themselves reasonable management salaries as they do — Adaeze receives no cash. She receives an economic interest in an entity that is growing in value but distributing nothing. Her accountant reminds her that she owes income taxes on her allocable share of the LLC's profits, even if she received no distribution to pay those taxes with. The technical term for this outcome is phantom income. For the spouse of a small business owner in Plano who just lost her husband, the colloquial term is devastating.
Consider management decisions. Marcus and Vincent want to hire a new general manager at a $90,000 salary — a decision that will reduce short-term distributions but position the business for the Frisco opening. Under the LLC's operating agreement, management decisions require approval of members holding a majority of the membership interests. Marcus and Vincent together hold 60%. They approve the hire. Adaeze — holding 40% of the economic interest, with no vote — has no recourse.
Consider the buyout. Some operating agreements include a provision that, upon a member's death, the surviving members have the right to buy out the transferee's interest at a price determined by formula — say, three times the LLC's EBITDA for the prior twelve months, or at book value per the most recent tax return. If the formula was negotiated years earlier, when the business was smaller, and if the business has grown significantly since then, the formula price may represent a fraction of the market value a willing buyer would pay. Adaeze may be offered $180,000 for an interest that a restaurant broker would value at $380,000. And if the operating agreement provides the surviving members with a right — not an obligation — to buy at that formula price, they can wait her out: offer low, let her live on phantom income for months, and see whether financial pressure makes the offer look more attractive.
This is not predatory behavior. It is operating-agreement math. It is what happens when a succession plan was never written.
The Fix Is Not Complicated — It Just Has to Happen Before the Death
Texas business attorneys and estate planners reach for several tools when addressing LLC succession, and in most cases the solution involves the operating agreement and the estate plan working together.
Questions about business formation? A WG Law attorney can walk you through your options.
The Operating Agreement Fix. A properly drafted Texas LLC operating agreement can specify exactly what happens when a member dies. The agreement can provide that the deceased member's interest passes to a named successor with full membership rights — not merely an economic interest. It can specify the buy-sell mechanism: who can buy, at what price, using what formula, on what timeline. It can require the LLC to carry life insurance on each member — a key funding mechanism — and mandate that proceeds be used to purchase the deceased member's interest at fair market value, giving the family a clean cash exit and the surviving members unencumbered ownership.
A buy-sell agreement funded by life insurance is one of the most cost-efficient succession tools available to a multi-member Texas LLC. The premium is predictable; the payout is guaranteed; and the family receives fair value at a moment of maximum vulnerability, rather than being forced to negotiate against surviving co-members who have no legal obligation to be generous.
The Trust Fix. Holding an LLC membership interest inside a revocable living trust — rather than in the member's individual name — resolves much of the probate exposure and simplifies the succession mechanics considerably. When a trust holds the membership interest, the member's death does not trigger a legal transfer of the interest in the same way. The successor trustee steps into management without waiting for probate administration, without a gap in governance authority, and without exposing the interest to probate creditors. The operating agreement must be reviewed to ensure it permits trust ownership and that the trust's successor trustee steps in as a full member — not merely as an economic transferee — but with proper coordination between the estate planning attorney and the business attorney, this is a straightforward provision to include.
The Timing Rule. Both fixes share a prerequisite: they must happen before the death. An operating agreement amendment negotiated after a member's death cannot retroactively cure the governance gap. A trust created after a member's death cannot retroactively hold the membership interest that has already transferred through the probate estate. The planning that protects a family — and protects the business — has to be done when everyone is alive, healthy, and willing to confront the uncomfortable reality that one of them will eventually die.
In North Texas, where small business formation is booming — Collin County alone has seen thousands of new LLC filings annually — the vast majority of those businesses are formed without succession provisions in their operating agreements. The LLC is formed, the EIN is obtained, the bank account is opened, and the succession plan is filed in the mental category of things we'll get to later. For the families of business owners who die before "later" arrives, that deferral becomes a crisis measured in months of probate, negotiation, and phantom income.
Three Questions to Ask About Your Texas LLC This Week
If you own an interest in a Texas LLC — alone or with partners — three questions determine how much risk your family currently carries:
- Does your operating agreement address what happens to your membership interest when you die? Not your economic interest. Your membership — your vote, your management rights. If the agreement is silent, or if it uses generic statutory language without specifying what the deceased member's successor actually inherits, your family inherits an economic interest only. That is the default. It is rarely what the business owner intended.
- Is there a funded buy-sell agreement in place? A buy-sell agreement without a funding mechanism is a plan with no money behind it. The surviving members may have the right to purchase the interest at fair market value — but if there's no insurance policy, no escrow, no agreed financing, the purchase price exists only on paper. Life insurance is the standard funding mechanism for small business buy-sell agreements, and the coverage amount should be reviewed against current business valuations at least every two years.
- Does your estate plan align with your operating agreement? A will that says "I leave my LLC interest to my wife" and an operating agreement that says the surviving members have the right to purchase that interest within ninety days can produce a conflict that a probate court has to resolve — at expense and delay to everyone. A trust that holds the LLC interest, combined with an operating agreement that permits trust ownership and names the successor trustee as a full member, avoids most of that conflict before it begins.
If you cannot answer all three questions with confidence, the gap in your planning is already there. It simply hasn't cost anyone anything yet.
Back to Plano
Adaeze Okafor spent seven months in negotiation with Marcus and Vincent before the situation resolved. Their operating agreement contained a right-of-first-refusal provision — but no formula price and no timeline. The parties ultimately agreed on a fair market value appraisal by a neutral restaurant broker, and Adaeze received $310,000 for the 40% interest. Her attorney believed the number was reasonable, but that she might have received it in weeks rather than months had James held a funded buy-sell agreement. The seven months of phantom income she had been allocated — roughly $28,000 in taxable income on which she received no cash distribution — was factored into the final settlement. Her accountant called the outcome clean. Her attorney called it a resolution that cost everyone more than it should have.
Marcus and Vincent hired a business attorney in May 2024. Their new operating agreement includes a funded buy-sell agreement, a succession provision naming each member's spouse as a full successor member in the event of death, and a mandatory annual review of life insurance coverage amounts against current business valuations. They did not need Adaeze's crisis to understand the lesson. But it was the thing that finally made them act on it.
James Okafor knew his business had value. He thought he had a plan — the will, the life insurance, the general sense that his wife would be taken care of. What he did not know was that the most important document governing what Adaeze would actually inherit was not his will. It was his operating agreement. And it said almost nothing.
Carla Alston is a business and estate planning attorney at WG Law with an LL.M. in Taxation from NYU School of Law and 39 years of practice, including deep experience in business entity planning and tax-smart succession strategies. Philip Burgess is an associate attorney at WG Law focused on business formation, estate planning, and probate, with a background in IT infrastructure and a practice based in McKinney and Southlake. If you own a Texas LLC — alone or with partners — and have not reviewed your operating agreement for succession provisions, call 214-250-4407 or contact WG Law to request a consultation. The planning is not complicated. The timing is everything.
For related reading, see our articles on beneficiary designations and Texas estate planning, digital-asset estate planning in Texas, and Lady Bird deeds for Texas real estate transfers. To learn more about WG Law's business formation practice, visit our business formation practice area page.
This article is provided for general informational purposes only and does not constitute legal advice. Texas LLC law, business succession planning, and estate planning requirements vary based on individual circumstances. The scenario described is a hypothetical illustration. Nothing in this article should be relied upon as legal guidance for any specific business succession or estate planning decision. Consult a licensed Texas attorney for advice tailored to your situation.