what happens to an llc when the owner/a member dies

2022-07-29

What Happens to an LLC After a Member Dies?

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Forming an LLC is a good way to protect your business assets in the event of a lawsuit or bankruptcy. However, if you’re considering creating an LLC, you may be wondering what happens to your ownership interest after you pass away. At Phelps LaClair, we’re here to help you secure the future of your business with our expert estate planning services. Continue reading to find out more about what happens to an LLC when a member dies.  

LLC Operating Agreement

An LLC operating agreement is a contract between the LLC members that is used to control the internal affairs of the business. For example, the contract may list the members of the LLC and state the percentage of each member’s ownership interest. 

In many cases, the operating agreement includes specific instructions for how to transfer an LLC member’s ownership after the member’s death. For instance, all the members can agree to include a transfer-on-death (TOD) clause dictating that after a member passes away, their ownership interest would automatically transfer to the remaining members. Otherwise, the shares would transfer to a family member as part of the deceased member’s estate. 

If you and the other members of your LLC have not yet determined what happens after a death, make sure to amend your operating agreement to ensure a smooth transfer of shares. 

What Happens to an LLC After a Member Dies?

Unless the operating agreement says otherwise, a member’s ownership interest in the LLC becomes part of their estate after they pass away. The ownership interest is then considered personal property, which will transfer to the estate owner’s heirs. However, the only way to guarantee who receives some or all of your shares in the LLC is by creating a will or trust and naming beneficiaries.

If you die without a will or trust, then your estate, including your ownership interest in the LLC, will go through probate. Probate is a long, complicated court process for administering your estate. Your next of kin, as determined by the court via the laws of intestate succession, will end up inheriting your property if you die without a will. 

However, what happens to the LLC itself depends on how the operating agreement determines your heirs’ rights regarding the LLC. For instance, the contract may allow the remaining members to buy the ownership interest from the deceased member’s heirs. An operating agreement can also dictate whether or not the heir cannot receive voting or management rights regarding the business.

What Happens to a Single-Member LLC After the Owner Dies?

If there is only one member in an LLC, the ownership interest still transfers to their estate after their death. However, just like a multi-member LLC, an operating agreement can dictate otherwise. For instance, Arizona is a community property with the right of survivorship state, meaning any property someone owns automatically transfers to their spouse after their death. You can use an operating agreement to pass your ownership interest to someone else or to dissolve the LLC after your death. 

LLC Planning in Arizona

Creating an operating agreement that best fits the needs of the business and its members can seem confusing or overwhelming. Luckily, our expert estate planning team can help you form a well-designed plan and create an operating agreement that details exactly what happens to the LLC when a member dies. Call 480-892-2488 today to learn more about LLC planning with Phelps LaClair. 

Images used under creative commons license – commercial use (7/29/2022). Photo by Medienstürmer on Unsplash

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