You Can’t Take It With You: What Happens When an LLC Member Dies

Death sucks.

Besides the whole downside of not being alive anymore, it may cause a lot of problems for others after you’re gone.

This is especially so if you own a membership interest in a mutli-member limited liability company (LLC).  

An LLC is an entity owned by its members.  What happens to the LLC upon the death of a member depends upon a number of factors.

Customarily, a deceased member’s interest in the LLC will pass to that member’s beneficiaries in accordance with either a Last Will & Testament or the state’s inheritance law (in the event that member died intestate, without a will).  Alternatively, the terms of an LLC’s Operating Agreement may govern.

A well-drafted Operating Agreement is imperative for any LLC.  If you have an LLC, either a single-member or especially with a multi-member LLC, you need an Operating Agreement.  Failure to do so is imprudent and will only lead to future difficulties.

Assuming your LLC has an Operating Agreement, you can control what happens upon the death of a member.
Here are a few options:

1.  Legal Representative Takes Over

This occurs when the deceased member’s interest passes to his/her estate.  The deceased member’s LLC interest will now be managed by the estate’s legal representative, often a family member/heir of the estate.  

The legal representative will now share in the profits and property of the LLC, along with the surviving members.  Upon any dissolution of the entity, the legal representative will receive a share of any post-liability proceeds. For example, In Florida, if an individual LLC member dies, that member’s legal representative may exercise all of the member’s rights (FLA. STAT. § 605.0504).

This does not mean that the legal representative is now entitled to manage the affairs of the LLC with the surviving members.  That is something that must be agreed upon by the other members. Often, a legal representative will hold the deceased member’s LLC interest, but will not engage in management of the entity.

The problem with this solution is that the surviving members are now ‘in business’ with somebody with whom they may not wish to be.  That’s a problem. Whereas the deceased member may have been a shrewd business person offering valuable insight and counsel to the LLC, his/her legal representative might be a boorish, know-it-all with no business experience.

Nobody wants to get caught in this situation.

There is a way to avoid this:  The buy/sell agreement.

2. Buy/Sell Agreement

An alternative solution is that the surviving members are given the option to buy out the deceased member’s interest at market value.  This need not be a separate agreement, but is often a provision within the Operating Agreement.

The Buy/Sell provision of an Operating Agreement will express the terms upon which transfers of interest in an LLC occur.  For example, it may call for an optional buyout, where the surviving members will have the option to buy the deceased member’s interest, or a forced buyout, where they are legally obligated to do so.  

Although not an LLC Operating Agreement requirement, Buyout provisions solve many problems: they are essential to business continuity; they avoid ‘unwanted partners’; and they allow the deceased member’s heirs the certainty of a payday.

3. Dissolution

Unlike aging milk, most LLCs don’t have an expiration date.  Instead, they are said to have a perpetual existence. That means that the death of a member (or even all of the members) will not trigger the end of the entity.

Although your LLC may have perpetual existence, it may list certain trigger events that would lead to a dissolution.  Death of a member could be a trigger event.

However, assuming that the LLC is active and income-producing, the remaining members may not wish to dissolve the entity solely due to the death of a single member.  This is an issue that must be discussed up-front, when drafting the Operating Agreement.

If you are thinking about forming an LLC, or have already formed an LLC but have not drafted an Operating Agreement (or drafted one by yourself using some online forms), you should certainly have an attorney available to assist you before moving forward.  Should you find yourself in this position, contact the Greenbaum Law Firm, P.A. to schedule a consultation today.

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Greenbaum Law Firm, P.A.

The Greenbaum Law Firm, P.A. is a boutique, client-centric law firm concentrating in the areas of business and corporate law, contracts and agreements, and real estate. Our unique approach to the practice of law consists of positioning our clients at the center of the legal practice and pursuing their objectives in the most efficient and transparent manner.

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