The death of the owner of any type of small business can be difficult to surmount. The company is confronted with the loss of a key manager and decision maker, and is faced with questions concerning how to keep the business going and how to compensate the owners’ heirs for the value of the business owners’ interest.
A limited liability company (LLC), is a legal entity, separate and distinct from its owners. It has aspects of a partnership. The owners of an LLC are called members and can be other entities or people. The member’s rights upon death can be memorialized in an operating agreement. If not , by state law or perhaps the member’s estate planning documents (Will or Trust) can provide guidance on valuation or business succession matters.
An operating agreement is a document that governs the affairs and management of an LLC. This agreement is signed by the members. It usually designates how profits, losses and distributions are shared and what events will cause the LLC to dissolve. The operating agreements can handle business succession issues such as what will happen if a member dies, suffers a temporary or permanent incapacity or resigns. Operating agreements may stipulate that other members can buy a deceased member’s share of the LLC at market value before an heir has any right to the interests.
If the operating agreement is silent about what happens to a member’s interests upon, state law may provide the answer. Some states provide that an LLC is dissolved when a member dies. Other states, permit an executor of a deceased member’s will or trustee of a trust to settle the estate and determine what happens to the member’s LLC assets.
Unless prohibited by the LLC’s operating agreement a member has the right to transfer his or her share of the LLC’s profits, losses and distributions upon death. Some States, such as New Hampshire permits the member to designate a person to receive his right to vote and manage the LLC when he or she dies. If the operating agreement and the member’s will are both silent (or if the member has no will – known as intestacy), the deceased member’s interest passes to his or her estate, usually his spouse or children in some percentage. Most states have laws stating that heirs can inherit a member’s financial interests but not his or her management interests in the LLC (i.e. rights to vote on ordinary LLC matters).
Finally, an LLC does not automatically terminate or dissolve with the death of one of its members. Dissolution means that the LLC winds up its business, pays off its debts and finishes or transfers its contracts. The LLC then distributes profits and losses among members before terminating. A few states have a law that states an LLC must dissolve if a member dies. The LLC’s operating agreement might also include a clause that the LLC must be dissolved when a certain member dies.
Keeping on top of these items will make the sale process much easier and less stressful. Take action now and you will improve your chances for a successful exit.
For more information on real estate, business transactions or general business planning and purchase and sale matters please contact the attorneys at Welts, White & Fontaine PC. Please contact us by clicking here or by calling (603) 883-0797. Welts, White & Fontaine is one of Nashua’s largest, multi-practice law firms and serves the legal needs of both individuals and businesses in towns such as Amherst, Milford, Hudson, Brookline, Windham, Hollis, Merrimack, Concord, Manchester, Litchfield, Bedford, Londonderry, Pelham, and, of course, Nashua.
Author: John S. Polgrean, Esq.
This blog is intended for informational use only. The information contained herein should not be construed as offering legal advice or a legal opinion.