What Happens to an LLC When a Member Dies?

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Determining what happens to the ownership of an LLC is one of the crucial steps of creating an estate plan. If you're the owner, it's especially important if you intend the business you've created to survive after your death. Fortunately, there are several options to assist the survival of the company and mitigate the legal confusion and expense for your loved ones.

Understanding Your Operating Agreement

First and foremost, you must fully understand how your LLC is set up. This may seem straightforward, and if you own a single member LLC it is. But if you have partners, you should review your operating agreement carefully to determine if there are transfer procedures in the event of a member death. If your LLC operating agreement includes such a clause, let your estate attorney know in advance so he may properly address that in your estate documentation.

Transferring Ownership Through a Will

If the transfer of ownership is not addressed in the operating agreement, or you own a single member LLC, you must determine in other ways who gets the company. While this may be accomplished through a last will and testament, it is cost prohibitive. When property is transferred through a will, it must go through the probate court system. As a result, your beneficiaries will pay far more in legal fees and probate costs than necessary.

Transfer of Membership

A Transfer of Membership allows you to specifically name who gets your shares of the LLC. You may use one document to transfer shares of multiple companies and may name multiple individuals as beneficiaries. However, this does not become effective until you die. As such, if you were to become incapacitated for any reason, it does not allow your named beneficiaries to step in and take over the business operations.

Revocable Living Trusts

One way to address a possible serious medical injury is through a revocable living trust. It provides protection from the probate system while allowing you to transfer property directly to your beneficiaries. If you are unable to care for yourself, the trust allows your trustee to step in and oversee your affairs without any type of interruption.

Protection for a Partner's Death

If you're in a partnership LLC, you need to create a succession plan that covers the departure of key members. You and your partners should also adopt a buy/sell agreement to allow managing partners to immediately purchase the shares of a deceased member. This will prevent family members with little knowledge of the business from gaining control of the company and eliminate the need for the shares to go through probate court.

Tip

  • The succession or transition plan that may work for one organization will not necessarily work for another. Discuss the long-term goals of the business with your partners and formulate a plan that best fits those needs.

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