What Happens When an LLC Member Dies? (In-Depth Guide)
The unexpected passing of a limited liability company member is a deeply challenging event that can occur at any point in the life of a business. The way these situations are managed, influenced heavily by the details of the operating agreement, can be pivotal in determining whether the business itself continues to thrive or faces significant difficulties.
As a Mergers and Acquisitions specialist with extensive experience, I have guided numerous business owners through the delicate process of transferring ownership after the death of an LLC member.
What steps can you take to safeguard the future of your LLC in the face of such adversity, and how can you honor the contributions of the departed member?
Join me as we explore these critical questions.
Quick Summary
- If an LLC member passes away, the process will be managed in accordance to the specific provision of the Operating Agreement or state laws.
- You can hire a formation service to draft an operating agreement to help maneuver the event.
- There are at least 15 distinct LLC formation services in the USA, including services such as ZenBusiness, LegalZoom, and Swyft Filings that can help you draft an effective operating agreement.
- In as much as most states do not require an operating agreement, l emphasize the importance of the document, and encourage clients to include all possible eventualities with regard to its provisions.
What Happens When an LLC Member Passes Away?
When an LLC member passes away, the deceased member’s interest can be bought out, transferred to heirs, or handled in another manner.
The consequences and next steps can vary significantly based on the LLC’s operating agreement, state law, and whether the LLC is a single-member or multi-member entity.
Here’s what Venture Smarter's research reveal regarding the different types of LLCs:
1. Single-member LLC
Typically, a single-member LLC or sole proprietorship is dissolved when its owner passes away. The remaining assets of the company will proceed to the beneficiary(ies) of the deceased. In the absence of a will, the court will distribute the assets according to the rules of succession in the state.
"The business entity may continue to exist if an operating agreement includes a provision of determining a successor to the deceased member, or family members elect to maintain the LLC."
- LJ Viveros, Growth & Transition Advisor
2. Multiple-member LLC
If an Operating Agreement is in Place
The operating agreement outlines the general provisions of the LLC, including the necessary steps needed to be taken in the event that a member passes away. The remaining members implement the provisions and amend the Articles of Organization to update the state as well as the IRS [1].
From Venture Smarter's observation, most LLC distribute the ownership shares of the deceased in accordance with the operating agreement of the LLC.
An operating agreement will dictate the terms of whether the remaining members can buy ownership interest from the family of the deceased.
While not a requirement to operate an LLC in the country, an operating agreement is mandatory in five states, including California, Delaware, Maine, Missouri and New York, as reviewed by Investopedia [2].
The document would also help determine if an heir or assignee could inherit ownership and become a member of the company.
Venture Smarter always advises LLC members who prefer this kind of arrangement to include a TOD (transfer-on-death) section in the operating agreement. A TOD clause dictates that if a member passes away, their ownership interest would automatically be transferred to the remaining members.
If the operating agreement does not contain such a provision, ownership shares of the deceased would be transferred to a family member as part of their estate.
In the Absence of an Operating Agreement
If the limited liability company does not have an operating agreement, state laws will be applied to determine how the ownership interests are treated.
The ownership shares will proceed to the specified beneficiaries if the deceased left a will or trust. In the absence of either document, Venture Smarter recommend seeking legal assistance.
In most case, succession or inheritance would is determined by the court through a probate process.
Similar Article: How to Remove a Member From Your LLC
Navigating the Passing of an LLC Member - A Case Study
As a Mergers and Acquisitions specialist, I once worked with a Seattle-based software development firm that had lost a founding member suddenly.
Fortunately, the firm was prepared with a comprehensive operating agreement that included a buy-sell agreement funded by life insurance. This critical foresight allowed for a smooth financial transition following the member's unexpected death.
Upon his passing, the life insurance payout was promptly utilized to buy out his shares, ensuring financial stability and uninterrupted business operations. In his honor, the remaining partners established a scholarship for aspiring software developers, reflecting his passion and the company's mission. This gesture helped maintain morale and reinforce the company's values during a difficult time.
This LLC’s experience highlights the importance of having structured agreements in place for such contingencies. The firm not only managed to sustain its operations but also experienced growth in the subsequent year, demonstrating the effectiveness of its planning and the resilience of its team.
FAQs
What Happens to a Business Bank Account when an LLC Member Dies?
When an LLC member dies, the bank account will proceed to the specified beneficiaries of the will, otherwise the assets will be distributed according to state laws.
What Happens to Business Debts when an LLC Member Passes Away?
When an LLC member passes away, business debts will be settled through the assets of the estate.
References:
- https://www.irs.gov/charities-non-profits/exempt-organizations-reporting-changes-to-irs
- https://www.investopedia.com/terms/l/llc-operating-agreement.asp
