In both single-member and multi-member LLCs, the owners require to have a plan for what occurs in the event when a member dies. Should the LLC proceed or should it automatically cause cancellation? Who has the right to purchase the interests of the deceased member? Do family members get voting rights or just assignment of distributions? The LLCs Operating Agreement must contain clear answers to these questions. Careful planning helps both the family of the deceased member and the remaining members.
LLC Member Interest:
The LLC operating agreement describes that your LLC interest is your rights and privileges. LLC membership interest is usually not held in the form of a membership certificate such as 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 distributed to the LLC members in proportion to their ownership percentage. There can be voting and non-voting interests and they may have other rights and classes. There is normally one class of 1000 voting units.
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 within the operating agreement and control through your estate plan.
Although it is possible to have LLC interests payable on death to named beneficiaries, that provision is very uncommon. Instead, Interests of LLC can be titled in the name of your estate planning revocable trust. If the interests are titled in your name, they will be controlled by your testament. However, passing on an interest in an active business can be an undesirable burden to both your loved ones and your surviving business partners.
The significance of a buy/sell provision
The most important action you can take to protect your LLC interest in the event of death is to write a "Buy / Sell" provision in your LLC operating agreement for a multi-member LLC with an effective business operation.
The Buy / Sell provision is an effective set of instructions. It stipulates the rules and terms under which transfers of interest occur in an LLC. In the "Buy / Sell" provision, you may write stipulations for what will be done with the interest of the LLC members when they die. 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 benefit of this forced buyout at a set formula price financed over a period of time (5-year note) is that it helps business continuity. It keeps out unwanted partners, like spouses or children or other members.
The Buy / Sell provision is usually not included in standard was 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 do not want to go into business with the other LLC members either.
Your Buy / Sell provision (along with a stipulation that lives 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 sale 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.