The Company Agreement Explained: What are Classes of Members?
August 19, 2013 | By Vela Wood
Having different classes of members is just like having different classes of stock in a corporation. Oftentimes, it’s a good idea to set out classes of members when you want members to have different rights or duties. Situations where setting up different classes of members might be beneficial include: to create preferential classes during capital raises, adding a class of silent members, or employee classes.
Section 101.104(a) of the TBOC provides that an LLC can create the different classes of members in the company agreement by (1) setting out those classes and their rights or (2) providing the manner in which to establish classes of members in the future. In the event the company agreement does not provide the manner of establishing the classes of members, classes of members can only be established by amending the company agreement.
It is important to note that the different classes can carry identical rights but also carry different voting, distribution, or allocation rights. You can determine how you want to name the classes, but we generally advise that our clients keep it simple – for instance, Class A Members, Class B Members, Class C Members, and so on.
Great care needs to be taken when creating the different classes of members. Without the proper advice, the implications could be great. As a result, it would be beneficial to reach out to Vela Wood PC or your attorney and an accountant if you are interested in creating different classes of members for your LLC.
Ashley Robertson is an associate at Vela Wood and focuses her practice in the areas of corporate law, startups and small businesses. You may reach Ashley at firstname.lastname@example.org.
Posted in Company Agreement Series
Vela | Wood is a boutique corporate law firm that focuses on small businesses, entrepreneurs, and startups.