LLC Death of Member: Everything You Need to Know
An LLC death of member situation results in passing of their company shares to their beneficiaries where it will be distributed according to the member's will.3 min read
2. About the Operating Agreement
3. Transferring LLC Ownership
Updated November 3, 2020:
An LLC death of member situation results in his or her shares of the company passing to their beneficiaries where they will be distributed along with the member's estate according to the member's will or the inheritance law of the state.
About an LLC Operating Agreement
The manner in which an LLC is affected by the death of a member depends on the terms outlined in the operating agreement and the laws of the state where the LLC is registered.
An operating agreement is entered into by most LLCs as a means of regulating the internal operation and affairs of the company. In a well-drafted operating agreement, the effect of how the shares will be handled in the event of a member dying will be clearly stated. For example, the operating agreement may specify that the remaining members may buy out the shares of the deceased at market value. Another option in the operating agreement may call for the dissolution of the LLC if any member dies.
If no operating agreement is in place or if there are no instructions in the operating agreement covering the death of a member, then the laws of the state will determine the steps to take. This will affect the business. In some states, the death of an LLC member can result in several outcomes. These include:
- The automatic dissolution of the LLC.
- The executor for the deceased takes over the membership.
- The executor may share the profits but does not participate in running the business.
In the case of a single-member limited liability company, it is up to the laws of the state whether the LLC will be dissolved automatically or if ownership is transferred to the deceased member's heirs. In Nevada, Chapter NRS 86.491, for example, the state law says in the event a sole member of an LLC dies, the deceased member's interest will be passed to the heirs according to his or her will or per the state laws. It will then be up to the recipient(s) to choose to continue with the business or apply to have the LLC dissolved under the laws of the state.
One example notes the Ohio Code states if a member dies, the legal representative or executor can exercise the deceased member's membership rights in an effort to settle the deceased person's estate. In another example, the North Dakota Limited Liability Company Act states when a member dies, his or her legal representative will retain the financial rights to the company but will lose all rights to participate in the governing of the LLC.
About the Operating Agreement
The operating agreement governs the affairs and management of the limited liability company. It outlines how the profits, losses, and distributions will be shared, and what events must occur for the LLC to be dissolved. The agreement usually stipulates what will happen when a member dies, resigns, or is unable to function. The agreement is signed by the members.
An LLC will not automatically dissolve or terminate due to the death of a member unless there is a clause stating the LLC is to be dissolved or there is a state law that mandates dissolution. To dissolve an LLC means the company will finish business by paying off any debts and honors or transfers its contracts. Any profits or losses are then distributed among the members prior to the final termination of the LLC.
Transferring LLC Ownership
If you have partners, a clause can be added to the operating agreement that in the event of the death of a member his or her shares can be transferred. If you choose not to add a clause, as a single owner, you may opt to leave instructions in your last will and testament with instructions to your attorney.
If you use a Transfer of Membership, you can name who will receive your shares of the LLC upon your death. You have the option of naming multiple individuals as your beneficiaries. The document will not become effective until your death, which means should you become incapacitated for any reason the individuals you've named as beneficiaries do not have the authority to take over the business.
A revocable living trust allows you to transfer property directly in the event of a medical situation. By having the living trust, your trustee can step in to oversee your affairs.
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