top of page

What Happens When an LLC Member Dies?

While death and taxes may be certain, the former can be more unpredictable than the latter. Ideally, the company’s governing documents include language to deal with the unexpected death of an owner. The owner’s personal estate plan can also impact what happens to their LLC interest upon passing away. But without proper planning, undesirable outcomes—such as dissolution of the business—could occur. 

To truly answer what happens to an LLC after a member dies, you must consider a number of factors and their interactions, including the language of the company’s operating agreement, the state law that governs the entity, and the personal estate planning tools the deceased member employed.

What Does the Operating Agreement Say?

The structure of an LLC is one of the elements that creates complexity when determining the outcome of an LLC member’s death. LLCs provide substantial flexibility in addressing matters of ownership, management, and financial rights, which are primarily governed by a contract called the operating agreement. 

Surviving members of an LLC may have no desire to do business with a deceased member’s spouse or children. They can avoid this possibility through a death clause in the operating agreement. Death clauses can be written to preclude a beneficiary from stepping into the shoes of a deceased member, such as with the following types of provisions: 

  • A clause stating that the beneficiary of the LLC interest will retain only financial or economic rights in the company and have no management rights. The beneficiary can receive an equitable share of distributions, but will not have voting rights or input in the direction of the company. 

  • The inclusion of a buy-sell agreement in the governing documents that allows the surviving LLC members to purchase the ownership interests of a deceased member from that member’s beneficiary. 

  • The dissolution of the LLC if a member dies, and the distribution of that member’s interests to their beneficiaries. 

Death clauses can also be used in single-member LLCs to facilitate ownership transfers. For example, the operating agreement could include a transfer-on-death clause that immediately passes the ownership interest to a specified successor at the time of the owner’s death. If this clause is utilized, care should be taken to ensure that it does not conflict with any instructions found in the owner’s estate plan. 

If the surviving LLC members welcome the spouse or children of a deceased member as a new business partner, they may still need to amend the operating agreement through a formal vote. 

The Consequences of Not Having a Plan 

In the absence of an operating agreement specifying the members’ intentions about what should happen upon their death, the surviving members and the deceased member’s heirs must rely primarily on the default rules under state law. Depending on the state, this could mean: 

  • the LLC is automatically dissolved; 

  • in the case of a single-member LLC, the owner’s heirs are allowed to continue the LLC if they elect to do so within a certain period, otherwise the LLC is dissolved; or

  • in a multi-member LLC, the deceased member’s estate receives financial or economic rights, but the heirs have no management rights and are at the mercy of the surviving members to make distributions to them. 

We Can Help

Whether you are the sole owner of a single-member LLC or the co-owner of a multi-member LLC, the key to avoiding default state rules and their often undesirable business outcomes is planning. 

Adding a clause to your operating agreement or including ownership transfer provisions in your governing documents are some of the ways to take control of your LLC’s future. Succession planning is best addressed when you initially form your business, but if you neglected succession early on, the next best time to protect your LLC and heirs is right now. 

We can help you create a plan that protects what you have spent years building. We can also help heirs understand and protect their rights regarding inherited LLC interests. Contact our office to set up an appointment. 

____________________________________________________________________________


THIS ARTICLE SHOULD NOT BE RELIED ON AS LEGAL OR TAX ADVICE (INFORMATIONAL PURPOSES ONLY)


Ryan E. Snow, JD/MBA, is a licensed attorney and experienced entrepreneur specializing in legal services for small to mid-sized businesses in all industries and at all stages of growth and development. He can be contacted via email at Ryan@RyanSnow.com or at his website www.ModernUtahLaw.com.

©2023 by Venture Counsel LC, all rights reserved.


11 views

Recent Posts

See All

Kommentarer


Kommentarsfunktionen har stängts av.
bottom of page