What happens to the LLC membership interest after death?

The owners need to provide a plan for what happens if a member dies, in both single-member and multi-member LLCs.Should the LLC proceed or should it automatically cause cancellation? Who has the right to purchase the interests of the deceased member? Do members of the family get voting rights or just distribution assignments? The Operating Agreement of the LLCs must provide straightforward answers to these questions. Careful preparation supports both the deceased member's family and the surviving members.

LLC Member Interest:

The LLC in operating agreement explains your rights and advantages of the LLC interests. Membership of LLC interest is not compulsory to be always in the form of a membership certificate like corporate stock. Instead, it is usually set out under the term "units" in the operating agreement. The LLC can authorize several units. The units are then divided equally among the LLC members according to their ownership percentage. There can be voting and non-voting interests and they may have other rights and classes. One class of 1000 voting units is there normally.

The standard operating agreement allows 500 voting units and 500 non-voting units. In the event of your death, you must protect your LLC interest by laying out what will happen to it. You can do this by operating an agreement and can control it with the help of your estate plan.

Although it is possible to make LLC interest payable to the designated beneficiaries upon death, this provision is very unusual. Instead, it is possible to title LLC Interests in the name of your estate planning revocable trust. If the interests in your name are titled, your testament will govern them. However, it can be an undesirable responsibility for both your loved ones and your remaining business partners to pass on an interest in an active company.

The significance of a buy/sell provision

The most significant step you can take to secure the interest of your LLC in the event of death is to write a "Buy / Sell" clause for a multi-member LLC with an appropriate business activity in your LLC operating agreement.

An efficient collection of instructions is the Buy / Sell provision. The rules and conditions under which interest transfers take place in an LLC are stipulated. You may write stipulations in the "Buy / Sell" clause on what will be done when they die in the interest of the LLC members. A common stipulation in the case of death is that LLC members have either the option to purchase your LLC interest or the legal obligation to purchase your LLC interest. The profits from selling the LLC interest would then go to your estate.

One advantage of this forced buyout over a period of time (5-year note) sponsored at a fixed formula price is that it helps business continuity. Unwanted partners, such as spouses or children, or other members, are kept out.

The Buy / Sell provision is usually not included in standard written LLC Operating Agreements from other incorporation services. For many purposes, this stipulation for living LLC members to buy your interest is useful. One of the most essential reasons is that LLC members usually do not want to go into business with the family of an LLC member. Moreover, the family of an LLC member does not want to go into business with the other LLC members either.

Your Buy / Sell provision (along with a stipulation that living LLC members have the right or duty to buy your interest that can be covered by life insurance), solves this issue by holding the LLC company within its original members and immediately disposing of your LLC interest after you die. Writing forced sales within the Buy/Sell provision of your LLC operating agreement is an effective measure to make sure that your LLC interest does not become a burden to your loved ones.


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