What Happens When an LLC Member Dies?

Key Points:

• LLC owners should plan for what happens to their business upon death or incapacity.
• Single-member LLCs generally face fewer complications than multimember LLCs.
• Death clauses in operating agreements or buy-sell agreements help protect the LLC and heirs.
• Without proper planning, default state rules can lead to dissolution or loss of management control.
• Succession planning is critical to ensure continuity and protect your business interests.

Table of Contents:

• Single-Member LLCs vs Multimember LLCs
• What Do the Governing Documents Say?
• Death Clauses in LLCs
• Consequences of Not Having a Plan
• Plan Ahead and Avoid Default Rules
• Contact Littleton Legal

In theory, a limited liability company (LLC) can last indefinitely. However, owners should plan for the day when they can no longer run their business, whether due to retirement, career changes, or death.

While death and taxes may be certain, death is far less predictable. Ideally, a company’s governing documents include provisions addressing an owner’s unexpected death. The owner’s personal estate plan also impacts what happens to their LLC interest. Without proper planning, undesirable outcomes—such as business dissolution—could occur.

Single-Member LLCs vs Multimember LLCs

All states and the District of Columbia allow single-member LLCs. Single-owner LLCs offer the same advantages as multi-owner LLCs but generally pose fewer complications in passing ownership. Single-member owners only need to consider their heirs and business continuity. Multimember LLC owners, however, must consider other members’ concerns, often addressed in the LLC’s governing documents.

What Do the Governing Documents Say?

LLC members enter business together, but under default state laws, an heir of a deceased member typically only receives economic rights and cannot manage the LLC unless the operating agreement allows it. New members are admitted only per the operating agreement, often requiring surviving members’ consent. A death clause in the operating agreement can prevent unwanted heirs from managing the LLC.

Death Clauses in LLCs

Death clauses can prevent beneficiaries from automatically taking over management. Common provisions include:

• A clause granting the beneficiary only financial rights, without voting or management control.
• Buy-sell agreements allowing surviving members to purchase the deceased member’s interest from heirs.
• Dissolution clauses distributing the deceased member’s interests to beneficiaries if no succession plan exists.

Single-member LLCs can use transfer-on-death clauses to pass ownership to a specified successor immediately. Care must be taken to avoid conflicts with the estate plan. If surviving members accept heirs as new partners, the operating agreement may require a formal amendment vote.

Consequences of Not Having a Plan

Without death or succession provisions, default state laws apply. This can result in:

• Automatic dissolution of the LLC;
• For single-member LLCs, heirs may continue the LLC only within a limited period, otherwise the LLC dissolves;
• For multimember LLCs, heirs receive economic rights but no management control, relying on surviving members for distributions.

Plan Ahead and Avoid Default Rules

Whether you own a single-member or multimember LLC, avoiding default state rules requires planning. Adding clauses to your operating agreement or including ownership transfer provisions in governing documents allows you to control your LLC’s future. Succession planning is best done at formation, but it’s never too late to protect your business and heirs.

Contact Littleton Legal

Littleton Legal’s business lawyers can help you create a succession plan that protects your LLC and informs heirs of their rights. Contact us at (918) 608-1836 to schedule your complimentary consultation.