LLC owners (known as members) have a financial stake in their company, initially called a capital contribution. As a business grows, each member’s share of the pot (their assets) will also grow. What happens to the company and its assets in the wake of a member’s death is determined by a few important factors.
What happens to an LLC after an owner dies?
Most LLCs create an Operating Agreement before officially conducting business. In addition to providing a general framework for a company’s day-to-day operations, a good operating agreement also includes information about what to do in case of certain emergencies, like a member’s death.
For example, an operating agreement may stipulate that the company must dissolve and distribute all assets in the wake of a member’s death. Or, it may allow an LLC to carry-on and add another member.
What if I don’t have an operating agreement?
If your business doesn’t have an operating agreement—of if your operating agreement doesn’t include instructions for how your LLC should respond in the wake of a member’s death—then your LLC will default to your state’s LLC laws. In some states, LLCs are required to dissolve and distribute all assets. In others, state laws don’t allow membership interest to be distributed without the approval of all remaining LLC members.
You should check with your state to find out how your LLC will be required to distribute assets (or not) in the event of a member’s death. Or, you can avoid these state-specific stipulations by including this information in your operating agreement.
What happens to a member’s assets after they die?
In the wake of a member’s death, that member’s assets (including his or her membership interest) will usually be distributed among his or her heirs. How assets get distributed is specified by that member’s personal estate plan and state probate laws. There are many individual considerations that go into both planning a business and planning a will, so it’s a good idea to seek legal counsel in both cases.