Most Texas business owners have thought about what happens to their house and their retirement accounts when they die. Far fewer have worked out what happens to the business, and the business is usually the largest and least liquid thing they own.
The answer is not intuitive, because an ownership interest in a Texas company does not behave like a bank account. It does not simply pass to your spouse or your children with the rest of your estate and keep working the way it worked before. What passes is narrower than most owners assume, and the gap between what passes and what the family expected is where the fights start.
Here is what Texas law actually does when an owner dies, broken down by entity type, and what a closely held business can do about it before it matters.
Start With What You Actually Own
The first question is what kind of interest is in your estate, because the rules differ.
If you own shares in a Texas corporation, you own personal property that passes through your estate like other personal property. The shares carry their voting rights with them. A successor who ends up holding the shares generally holds what you held.
If you are a member of a Texas limited liability company, which describes most closely held businesses formed in this state over the last twenty years, you own a membership interest. That interest is made up of two different things: the economic rights to distributions and allocations, and the governance rights to vote and participate in management. Texas law treats those two things very differently at death.
If you are a partner in a general partnership, the rules are different again, and the consequences of a death can reach the existence of the partnership itself.
Most owners assume the corporate answer applies to everything. For LLCs and partnerships it does not.
What Happens to a Texas LLC Membership Interest at Death
Section 101.1115 of the Texas Business Organizations Code governs the effect of a member’s death on a membership interest. Under that section, when a member dies, the member’s surviving spouse, if any, and any heir, devisee, personal representative or other successor become assignees of the membership interest to the extent of their respective interests.
Read that word carefully. They become assignees. They do not become members.
The distinction matters because of what an assignee can and cannot do. Section 101.109 sets out the rights of an assignee of a membership interest before the assignee is admitted as a member. An assignee is entitled to receive the allocations and distributions the assignor would have been entitled to receive, to the extent assigned, along with the limited rights the Code grants an assignee. The section does not give an assignee the right to vote or to participate in the management of the company. An assignee becomes a member only on approval, which under the default statutory rule means approval of all of the company’s members.
Put those two sections together and the practical result for a two member LLC is this. One member dies. The surviving spouse inherits the deceased member’s economic interest and is entitled to that member’s share of distributions. The surviving spouse has no vote. The surviving member, now the only person with governance rights, decides whether the company makes distributions at all.
That is a workable arrangement between people who trust each other. It is a bad arrangement between a surviving business partner and a grieving family who did not know the rules, and it is the single most common reason a death turns into litigation at a closely held Texas company.
Two qualifications matter. First, these are default rules. A company agreement can change nearly all of them, and Section 101.1115 expressly provides that the chapter does not impair an agreement for the purchase or sale of a membership interest, including one triggered by an owner’s death. Second, the rules for a single member LLC raise their own questions, because there is no surviving member to approve anyone’s admission, which is exactly why a sole owner’s company agreement should address succession directly rather than relying on the statute.
What Happens to a Texas General Partnership
For general partnerships the analysis starts in Chapter 152. Section 152.501 lists the events of withdrawal of a partner, and under subsection (b)(7)(A) the death of an individual partner is an event of withdrawal. Under subsection (a), a partner ceases to be a partner when an event of withdrawal occurs.
Whether that withdrawal requires the partnership to wind up its business, and what the deceased partner’s estate is owed, depends on the partnership agreement and on the winding up provisions of the Code. The point for an owner is simply that in a partnership, a death is a structural event and not merely a transfer. If two people have been operating a North Texas business as a general partnership on a handshake, the death of either one puts the continued existence of the enterprise in play. If you are not certain which entity form your business actually operates under, that is worth confirming this week, and our comparison of LLC and S corporation structures in Texas is a reasonable starting point.
The Probate Timeline Nobody Plans For
Even where the entity documents are clean, the estate side imposes its own delay, and businesses do not pause while a probate runs.
Until a will is admitted to probate and a personal representative is appointed, or until heirship is determined, there is often no one with clear authority to act on the deceased owner’s behalf. Banks ask for letters testamentary. A buyer in a pending transaction asks who can sign. A lender asks who controls the borrower. Meanwhile payroll runs every two weeks.
There is also a deadline worth knowing. Under Texas Estates Code Section 256.003(a), a will may not be admitted to probate after the fourth anniversary of the testator’s death unless the applicant shows by proof that they were not in default in failing to present it sooner. Section 256.003(b) adds that letters testamentary may not be issued on a will admitted after that anniversary unless the application was filed on or before it. The not in default showing is a real exception and it does get litigated, but the burden is the applicant’s, and it is not met by the fact that the whole family agrees on the outcome. A determination of heirship has no equivalent time bar and is sometimes the available path when a will cannot be probated, but it is a different and often slower proceeding.
The operational lesson is separate from the legal one. The business needs someone who can sign a check and access the accounts within days of a death, which is a question of banking authorizations and entity resolutions, not of probate. That is a thing to fix in advance.
What a Buy-Sell Arrangement Actually Does
A buy-sell arrangement is the mechanism most closely held Texas businesses use to replace the default rules with a result everyone agreed to in advance. It can live inside the company agreement or partnership agreement or in a separate document among the owners.
At a minimum a workable arrangement answers four questions.
Who buys. The company, the remaining owners individually, or some combination. The answer has tax and funding consequences and should be made deliberately rather than inherited from a template.
At what price. A formula, an appraisal process, a periodically updated agreed value, or a combination. A fixed dollar figure set years ago and never revisited is the most common failure mode. So is a formula nobody has ever run against real financials to see what number it produces.
On what terms. Lump sum or installments, over what period, at what interest rate, with what security. A company that is obligated to pay a departing owner’s estate a sum it cannot fund is a company in distress.
Funded how. Life insurance owned by the right party is the usual answer. An unfunded obligation to buy out an estate is a promise, not a plan.
Two failure modes are worth naming because they recur. The first is a buy-sell that was drafted correctly and then never updated through a change in ownership, a new partner, a refinancing or a tenfold increase in revenue. The second is a buy-sell that contradicts the company agreement, the partnership agreement or the estate plan, so that two documents give different answers and the family and the surviving owners each have a reading that favors them. Those documents need to be read together, by someone looking at all of them at once.
Where Community Property Comes Into It
Texas is a community property state, which adds a layer that owners in other states do not face. If a membership interest was acquired during marriage with community funds, the characterization of that interest is itself a question, and a surviving spouse’s rights may not line up with what the owner thought they were leaving to a child or a co-owner.
Section 101.1115 contemplates this directly by naming the surviving spouse as an assignee alongside heirs and devisees. Whether a particular interest is community or separate property, and what that means for who ends up holding it, depends on how and when it was acquired and on what the marital property agreements, if any, provide. This is one of the areas where an answer that sounds obvious is frequently wrong, and it is worth getting right in advance rather than arguing about afterward.
What to Pull Together Before You Need It
This is a document exercise more than a legal one, and most of it can be done in an afternoon.
Find the current signed company agreement or partnership agreement, including every amendment, and confirm that the signature pages match the people who actually own the business today. Find any buy-sell agreement and read what it says about death specifically, not just about voluntary transfers. Find the entity’s formation documents and confirm the ownership percentages on file match reality. Confirm who is authorized on the operating bank accounts and whether anyone other than you can access them. Confirm whether the life insurance that is supposed to fund a buyout exists, is in force, and is owned by the party the agreement contemplates. Then read those documents against your will or trust and see whether they agree.
If any of those documents cannot be located, that is the finding. An agreement nobody can produce is not an agreement that will govern a dispute. Our checklist of what every North Texas business owner should have in a legal file covers the full set.
Why This Gets Handled Late
Succession planning competes for attention with everything that is urgent, and it never wins, because the triggering event is both unlikely in any given year and unpleasant to think about. The result is that a large share of profitable North Texas businesses are operating on default statutory rules that none of the owners have read and none of them would have chosen.
The cost of fixing it in advance is a few hours and a document review. The cost of discovering it afterward is a dispute between a surviving owner who holds all the votes and a family that holds an economic interest with no leverage, litigated at the worst possible moment, while the business tries to keep operating. Owners who have been through it from either side do not need to be persuaded. The ones who have not are the audience for this article.
Worth noting as well: the same documents that govern succession also govern whether the entity’s liability shield holds up. Those questions turn out to be related more often than owners expect, and our discussion of when a Texas business owner can be held personally liable covers that side of it.
If you own a Texas company and have never confirmed what happens to your interest when you die, or you are a surviving owner or family member trying to work out what rights you actually hold, our business law attorneys in Frisco can review the governing documents and tell you where you stand under them.
Related reading
- What Should Be in a Texas LLC Company Agreement?
- What Happens When a Texas Business Partnership Breaks Down?
- What Is a Breach of Contract Under Texas Law?
About the author: John M. Hafen is a partner at Hanshaw Kennedy Hafen in Frisco, Texas. He focuses on complex commercial litigation and serves as outside counsel to companies across North Texas.