What Happens When One Owner of an LLC Dies?

Apr 4, 2024 | Business Law

Owning a Limited Liability Company (LLC) can be exciting and rewarding. Still, it also involves numerous challenges, such as achieving profitability, adapting to changes in the marketplace, and navigating growth goals.

However, a few challenges are more significant than an event like the death of a co-owner of an LLC.   

The loss of a loved one or business partner is an emotional time to begin with. In addition to the loss, this event can lead to disruptions in operations, staffing changes, and intense discussions among shareholders. However, with the proper measures in place beforehand, businesses can navigate these circumstances and preserve the future of the LLC.

What happens to an LLC when an owner dies without an estate plan or business success plan   

Generally speaking, when an LLC member passes away without governing documents or an estate plan in place, the following steps will be dictated by pertinent statutes and the type of LLC in question: 

If the deceased is the owner of a single-member LLC

If the deceased passes away without an estate plan, business succession plan, or will, one of three scenarios may unfold: 

  • If an heir wishes to continue running the business, they may request to do so through the probate court
  • If the estate administrator wishes to run the business, they may choose to do so
  • If no one wishes to run the business, the business will automatically be wound up, and any remaining assets will pass through probate

If the deceased is a member of a multi-member LLC

A multi-member LLC doesn’t necessarily dissolve if one of the members dies. Business operations can continue since there are other members. However, it’s vital to include provisions for what happens when a member dies as part of your operating agreement.

Depending on your operating agreement, the deceased member’s interest may be:

  • Bought out by the LLC or the remaining members for an agreed-upon price.
  • Purchased by the remaining members over time, with regular payments made to the deceased’s beneficiaries.
  • Transferred to a designated heir or beneficiary, who may or may not gain the same voting and management powers as the other members.

An operating agreement could also dictate that the LLC will be dissolved upon a member’s death. In such cases, the remaining members distribute all the remaining assets and may pursue other business interests. The deceased’s heirs only receive the monetary interest the deceased was entitled to; they aren’t entitled to participate in business management. 

However, having an estate plan and business succession plan allows LLC members and owners to create a glide path for their business in the event of their passing. 

How to protect your LLC when an owner dies

Both life and business are unpredictable. Still, there are many ways to protect your business continuity and legacy if you or another member dies. Each has its advantages, limitations, and tax implications, so it’s always best to consult with experienced business and estate planning attorneys to find the best approach for your specific situation and wishes. 

They understand the complexities of business, state laws, and estate planning, so you can have peace of mind knowing your wishes will be carried out properly.

Develop a succession plan

It’s wise to develop a clear succession plan that outlines who will take over management or ownership in the LLC upon your death. This can involve:

  • Family members
  • Business partners
  • Outside parties

Once you have your plan, include it in your operating agreement so that it’s legally binding. Your operating agreement can outline the process for transferring ownership and management responsibilities. Keep in mind, though, that if a succession plan diverges from the business’ operating agreement—especially for a multi-member LLC—then the operating agreement would take precedence. 

It’s always best to avoid these kinds of conflicts before they arise. Hence, working closely with an experienced business or estate planning attorney ensures all documents are in line and any succession occurs smoothly. 

Purchase a life insurance policy

Another option is to purchase a life insurance policy in which the LLC members, family members, or other loved ones are the beneficiaries. Doing this can provide the necessary funds to buy out your interest in the LLC upon your death, making the transition smooth and ensuring continuing financial stability.

Set up a buy-sell agreement

A buy-sell agreement is an agreement among LLC members that details what happens to a member’s interest in the business if they die, including:

  • Who can buy the interest
  • How the price will be determined
  • How the purchase will be funded

A buy-sell agreement and life insurance policy can also be used in tandem to protect an LLC, with the life insurance policy providing funds for a buyout of the deceased member’s interest in the LLC.

Leverage estate planning tools

Various estate planning tools exist to help business owners protect their assets. Some tools you can use include:

  • Will: With a will, you can specify how your assets—including your interest in an LLC—should be distributed after your death. While it does go through probate, it still provides clear instructions on how your assets should be handled.

  • Transfer on Death Deed (TODD): Depending on your state, you may be able to create a TODD for your business interests. This allows you to name a beneficiary who’ll receive your interest in the LLC upon your death. The best part? It doesn’t go through probate!

  • Power of Attorney: Granting a durable power of attorney to someone you trust allows them to manage your business affairs if you can’t, including at the time of your death until the estate is settled.

  • Voting trusts: A voting trust is an arrangement where LLC members transfer their voting rights to a trustee for a specified period. This allows for continuity in decision-making if a member dies.

  • Family Limited Partnerships (FLPs): In an FLP, family members hold shares in a partnership. You can transfer your LLC interests into the FLP and then plan for their succession and management through the FLP structure.

  • Joint ownership: Some states allow you to hold your interest in the LLC jointly with rights of survivorship. This means that your interest in the LLC automatically passes to the joint owner without the need for probate upon your death.

Partner with an experienced attorney to protect your business assets

Choosing an LLC structure, setting up operating agreements, and selecting the best financial and estate planning tools can take a lot of work for a busy business owner. There are many legal hoops to jump through, and even the most minor mistakes can put your LLC and business assets at risk.

Here at the law firm of Shann M. Chaudhry Esq., Attorney at Law PLLC, we care deeply about helping our clients protect the things that matter most to them. Our team of experienced business attorneys can help you set up a properly structured LLC and ironclad operating agreement to start your business off on the right foot (and keep it there). 

Our estate planning team is also here to help you choose the best tools to protect your assets and interests. Contact us today to set up your affordable consultation and see how we can help you protect your legacy and fulfill your wishes for the future.

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