How to Transfer an LLC Upon the Death of the Owner

When the owner of a single-member LLC dies, and one beneficiary then inherits the LLC, that person automatically becomes the new manager. When there are multiple heirs, however, the transfer may be simple or difficult, depending upon the LLC's operating agreement. It gets more complicated when some heirs want to sell the LLC and others want to continue it.

What Transfers When the Owner Dies

When the owner of an LLC dies, the LLC transfers to the heirs according to the terms of the deceased's will. In most circumstances, the heirs then control the the LLC. Who then manages the LLC, however, depends upon the operating agreement.

Ideally, the operating agreement designates the new manager in the event of the owner's incapacitation or death. It can be one of the heirs, or a hired manager.

If the members do not agree with the actions of the designated manager, in most agreements they have the power to terminate that manager and to hire or appoint another.

Potential Problems

Not every LLC has an operating agreement. When there's no operating agreement -- or an inadequately drafted operating agreement doesn't clearly define the rights and responsibilities of members and managers -- problems can arise. The new owners may not agree on a manager. Some members may want to sell the LLC entirely and others may want to continue it. Some owners may then want the others to buy them out.

At best, the new owners agree to draw up an operating agreement that covers these eventualities, possibly under the direction of a business attorney specializing in LLCs. When they cannot agree, however, any one of the members has the right to call for judicial dissolution -- an involuntary dissolution of the LCC under the supervision of the applicable court. Each state's laws are different, and how the dissolution proceeds depends upon where it occurs. In California, for example, any member can call for dissolution for several reasons, including the protection of her rights and interests, because "management is deadlocked," or even because there is "internal dissension."

Although it's fairly easy to get the court to take on a judicial dissolution, it's usually expensive and time-consuming. The court's first action often is to use LLC assets to hire three independent appraisers to evaluate the members' interests. Often individual members or groups of member hire their own attorneys to argue their case before the court.

Faced with this prospect, the new owners may decide to get appraisals without court supervision and use that evaluation to dissolve the LLC, either by liquidating its assets or by selling the LLC outright.

Tips

  • In many cases, those members who want to continue the LLC can do so by offering the member who wants to leave either the appraised value of her interest or even a little more in order to ensure that the purchase goes through.