What Happens When an LLC Owner or Member Dies?

Since a Limited Liability Company (LLC) can have one owner or an unlimited number of members, it’s not uncommon for an LLC to experience the death of one of its members. When that occurs, what happens to the ownership of the LLC?

First, let’s define some important terms:

• Probate occurs when someone dies, and their assets are distributed to pay their liabilities and beneficiaries. Stated another way, probate is a court-led, legal process that begins after someone passes away. The court will distribute their estate to the proper heirs.
• An executor is someone assigned to follow the deceased person’s wishes when they’ve left a will. If there isn’t a will, the court distributes assets according to the state’s rules of succession.
• In an LLC, the business owners/shareholders are referred to as members. An LLC can have one member or multiple members.
• When an LLC is formed, the business may create an operating agreement to outline the rights and obligations of the members, as well as the distribution of the LLC’s income. You are normally not required to create an operating agreement, but it is strongly recommended that you do so.

Now that we provided a basis for the elements of this discussion, let’s move on to covering what really happens to a business when an LLC owner or member dies.

When No Operating Agreement is in Place

When the LLC owner (or members) does not have an operating agreement is not in place, or the operating agreement fails to address the death of the owner, the deceased LLC member’s survivors will be forced to default to the state laws. In this case, the state’s rules will be used to determine how the LLC ownership and membership interests are treated.

An Operating Agreement is Key

As stated above, an LLC operating agreement is a legal contract between the LLC’s owners that outlines the rights and obligations of the members, as well as the distribution of the LLC’s income. One important reason it’s essential to have an operating agreement is to protect the future of your company.

For Example: If a member of your LLC dies, their ownership could be transferred to their heirs as indicated in their will, which could cause problems if the LLC members don’t want to work with the heir/s. If an operating agreement was in place that indicates otherwise, this troubling situation would not occur.

Typically, the LLC operating agreement is created at the time of business formation and it includes the following information:

• Members’ ownership percentages
• How profits and losses will be distributed
• The LLC’s management structure and the members’ roles and responsibilities
• How you’ll make decisions
• Members’ voting rights
• What happens if a member wants to leave the company
• How can the LLC be dissolved

When an LLC has multiple members, all members must sign the document before it is considered effective and valid. That means all of the members would be able to weigh in on the outcome of a member’s death and would be in agreement on what happens next.

If an operating agreement is in place and it provides instructions for the death of a member, the operating agreement will be used for managing the death of a member.

Do You Need an Operating Agreement for Your LLC?

If you don’t have an operating agreement or your current one doesn’t cover this issue, it’s critical to create or update your LLC’s operating agreement. We can help!