23 Jan 2018

You’re Dead. What about your single member LLC?

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Ugly title. I know. No one wants to think about dying, especially when just starting up a new LLC, but succession planning (who gets the business once you die) should actually be part of the startup process. An interest in an LLC is an asset. Even if it is a service business only, over time the LLC will have its own good will. Why would anyone want to let the value of asset just dissipate when the are gone?

As an example, let’s assume Jenny James owns a marketing company with two employees. She lives in Phoenix and is married to John James. Her accountant tells her to form an LLC to protect her personal assets from claims against her business if she or one of her employees does something to harm a client or other third party. Jenny wants her husband to inherit the LLC, but she failed to write that down anywhere. So now she has died. What happens to her LLC? If Jenny didn’t address this ahead of time John is either going to let the business also die or is going to end up going through a protracted probate.

Jenny could and should have taken some simple steps as she began setting up her LLC to ensure a smooth transition to John.

Three Possible Solutions

Solutions #1: The simplest and least expensive way for Jenny to secure the inheritance is to create an operating agreement. In the agreement, she would state that her LLC membership will pass to her husband, John, upon her death.

Solution #2: The second way Jenny could have approached the issue is to create a revocable trust. While that is more complex and more expensive, it does mean she doesn’t have to amend her LLC operating agreement if John dies before she does. It also covers many other assets besides the business.

Solution #3: The third way to handle the situation would be for Jenny to create a community property with right of survivorship membership. An LLC started during a marriage is considered community property so the spouse owns a ½ interest in the LLC. That however does not address what happens to Jenny’s half. So it make sense to draft the operating agreement so that it shows that upon Jennies death, John not only gets his half of the community but hers as well. This completely avoids probate upon her death and automatically transfers the business to John upon her death. The operating agreement should clearly state that Jenny will be entitled to manage the LLC as she wishes, and will protect her from having to share management with John unless she wants his involvement.

Note if Jenny does not want John to have any interest in her LLC she would have to get his signature on a disclaimer.

Oh. And don’t get us started about divorce and the LLC. That might be a topic for another post….

If you are concerned about your succession plan you should choose, your best bet is to ask an experience business attorney and have your situation reviewed.

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