Updated November 3, 2020:
When a member of an LLC passes away, their shares of the company are transferred to their beneficiaries and distributed according to their will or the inheritance laws of the state. The specific impact on the LLC depends on the operating agreement and the laws of the state where the LLC is registered.
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Understanding the LLC Operating Agreement
An LLC typically enters into an operating agreement to regulate its internal operations and affairs. This agreement outlines how the shares will be handled in the event of a member’s death. For example, it may state that the remaining members have the option to buy out the deceased member’s shares at market value. Alternatively, the operating agreement may call for the dissolution of the LLC upon the death of any member.
If there is no operating agreement in place or if it does not cover the death of a member, the laws of the state will determine the appropriate steps to take. Different states have different outcomes in such cases. Here are a few possibilities:
- Automatic dissolution of the LLC.
- The executor of the deceased member assumes the membership.
- The executor receives a share of the profits but does not participate in the management of the business.
For single-member LLCs, whether the LLC is automatically dissolved or ownership is transferred to the deceased member’s heirs depends on the laws of the state. For example, in Nevada, the state law specifies that the deceased member’s interest will pass to the heirs based on the will or the state laws. It is then up to the heirs to decide whether to continue the business or apply for the LLC’s dissolution according to state laws.
Similarly, the Ohio Code allows the legal representative or executor to exercise the deceased member’s membership rights in order to settle their estate. In contrast, the North Dakota Limited Liability Company Act states that the legal representative of a deceased member retains the financial rights to the company but loses the right to participate in its governance.
Role of the Operating Agreement
The operating agreement plays a crucial role in governing the affairs and management of the LLC. It dictates how profits, losses, and distributions are shared, as well as the events that may lead to the dissolution of the LLC. It also addresses what happens when a member dies, resigns, or is unable to fulfill their duties. All members must sign the agreement.
An LLC does not automatically dissolve or terminate due to the death of a member unless there is a dissolution clause in the operating agreement or a state law mandating dissolution. Dissolving an LLC involves settling its debts, honoring or transferring contracts, and distributing profits or losses among its members before the final termination of the LLC.
Transferring LLC Ownership
If an LLC has multiple members, it’s advisable to include a clause in the operating agreement that allows for the transfer of a deceased member’s shares. For single-member LLCs, the owner can leave instructions in their last will and testament, specifying who will receive their shares upon their death.
One option for transferring LLC ownership is to use a Transfer of Membership document. This document allows you to name the individuals who will receive your shares upon your death. You can designate multiple beneficiaries if desired. However, it’s important to note that the document only becomes effective upon your death. If you become incapacitated, the named beneficiaries cannot assume control of the business.
Another option is to establish a revocable living trust, which enables you to transfer property directly in the event of a medical situation. With a living trust, your appointed trustee can step in to oversee your affairs if necessary.
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