How to Name a Beneficiary for an LLC

By Stephanie Kurose, J.D.

How to Name a Beneficiary for an LLC

By Stephanie Kurose, J.D.

If you own a limited liability company (LLC), naming a beneficiary is a great way to plan for what happens when you pass away or are otherwise unable able to manage your business.

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A beneficiary is someone who receives some type of benefit from another person, typically because they are named in that person's life insurance policy, trust, or will. A beneficiary could be an individual or an entity, such as a charity or non-profit organization.

Read on to learn more about naming a beneficiary and what restrictions might apply.

Ownership in an LLC

An LLC is a common type of business entity that is a hybrid between a corporation and a partnership. Similar to a corporation, it provides its owners, or members, with protection from certain types of legal liability, such as the debts of the business. Unlike a corporation and similar to a partnership, an LLC allows for flexibility in management. For example, LLCs are not required to have a board of directors, hold regular board meetings, or take meeting minutes.

An LLC is considered a distinct legal entity separate from any of its members. Unlike a partnership, members of an LLC can transfer their ownership in the business to someone else.

Naming a Beneficiary

If you are going to transfer your interest in an LLC to another person, that person becomes the beneficiary. There are a number of reasons why naming a beneficiary is a good idea, including allowing you to plan ahead for what happens when you pass away, if you become disabled, or if you simply no longer want to run the business anymore.

There are two main ways to name a beneficiary for an LLC: in an operating agreement or in a will.

Naming in an Operating Agreement

State law typically does not restrict who can be a beneficiary, but other legal documents, such as the LLC's operating agreement, may restrict who can be designated or whether your interest can be transferred at all. If the issue of beneficiaries is addressed in the operating agreement, a state will consider that document as binding. Thus, make sure you are in compliance with the operating agreement before designating someone as your beneficiary.

If an LLC has not created an operating agreement yet, members should consider dedicating a section in the document to specifically name all of the beneficiaries.

Naming in a Will

If an LLC operating agreement does not allow you to transfer your ownership interest, an alternative option is to name a beneficiary in your will. The remaining LLC members will have the option of buying that interest if the beneficiary wants to sell it. If your beneficiary wants to keep the ownership interest, the operating agreement may allow them to collect your share of the profits without giving them the right to participate in the future management of the business.

If you are considering naming a beneficiary for an LLC, you should check your LLC's operating agreement and your state's laws to determine how to proceed. For further assistance, consult an expert online service provider to guide you through the process and answer any questions you may have prior to taking action.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.