Explained: What Happens When the Owner of an LLC Dies

What Happens When the Owner of an LLC Dies?

Written by:

Carolyn Young has over 25 years of experience in business in various roles, including bank management, marketing management, and business education.

Reviewed by: Sarah Ruddle

For over 15 years, Sarah Ruddle has been a noteworthy leader in the business and nonprofit world.

What Happens When the Owner of an LLC Dies?

What Happens When the Owner of an LLC Dies?

A limited liability company (LLC) is a business entity legally distinct from its owners, known as members. If an LLC only has one member, for instance, the LLC lives on after that owner dies. 

Even so, what happens to an LLC when members die is among the key points to include in the LLC operating agreement. Read on to learn about what to do when an LLC owner dies.

The Operating Agreement

Most states do not require an operating agreement, but it’s a very important document. It defines members’ ownership percentages and profit allocations. Those are the key elements of the operating agreement, but it should also include the following:

  • Each member’s rights and responsibilities   
  • Management structure and roles 
  • Voting rights of each member
  • Rules for meetings and voting
  • What happens when a member sells their interest, becomes disabled, or dies

You can find operating agreement templates online, but it’s best to have them drawn up or reviewed by an attorney. The language of an operating agreement is crucial and can often help determine how member disputes will be resolved and what happens if a member dies. 

If the LLC Has One Member 

Again, the operating agreement should specify what happens when the lone owner of an LLC dies. Usually, ownership in such cases is transferred to a specific person or entity.

If no operating agreement exists or does not specify what happens, the LLC becomes part of the deceased member’s estate. Settling the estate becomes complicated if the dead has more than one heir. Ownership must then be divided, or the LLC must be sold.

If ownership is divided between heirs, the management of the LLC must be determined.

State laws may come into play if the sole member dies and the operating agreement fails to outline the next steps. This is why an operating agreement is critical, even for a single-member LLC. 

If the LLC Has More Than One Member

If the LLC has more than one member, again, the operating agreement should specify what happens in the event of a member’s death. If no operating agreement exists, it can get complicated. 

If there is an operating agreement, provisions for a member’s death may be:

  • Surviving members must buy the deceased’s shares at fair market value
  • Heirs inherit financial interests of the shares, but not management interests
  • LLC must be dissolved, and the deceased’s ownership share distributed to heirs
  • The dead’s financial and management interests are transferred to a specific person or organization

If there is an operating agreement, or it needs to outline the relevant process, state laws will come into play. For example, in some states, the LLC will have to be dissolved, and the deceased member’s assets will be divided among the heirs.

In other states, laws prohibit the transfer of interests to heirs without the approval of all surviving members. If the deceased left his LLC ownership interest to beneficiaries, only the financial interests could be inherited, not the management interests.

In Closing

Death is an unfortunate and unavoidable element of doing business. For an LLC, the best way to cope with them and continue operations is to ensure the drafting of a complete and comprehensive operating agreement that details all the following steps—complicated when a member of the LLC dies. 

Be sure to draft yours with the assistance of an attorney to protect the interests of your heirs and fellow LLC members – and the future of your business.