What Happens to an LLC When a Member Dies?

By Laura Payet

What Happens to an LLC When a Member Dies?

By Laura Payet

A limited liability company (LLC) combines a partnership's flexibility with a corporation's limited liability protections. Its owners are called members and it can have one or many. When a member dies, whether they can leave their interest in the company to someone else depends on the company's operating agreement—or on state law, if there is no operating agreement.

Coworkers working around a table

A Member's Interest in an LLC

A member in an LLC has two essential interests in the company: a management interest and a financial interest. The management interest describes the member's participation in running the company, and the financial interest describes their share in profits, losses, debts, and assets. When a member dies, their share in the LLC becomes part of their estate, transferring through their will or according to the state's intestacy laws, if there is no will.

Single-member LLCs frequently lack operating agreements. In that case, when the sole member dies, state law determines what happens. In some states, an LLC with one member automatically dissolves when that member dies. In others, it passes to the members' heirs, who must decide whether to continue the business.

What the Operating Agreement Says

An LLC's operating agreement establishes how the business runs; it describes which members have management responsibilities and how to distribute profits and losses. A properly written operating agreement also includes provisions that address what happens when a member dies. For instance, the operating agreement might require the surviving members to purchase the deceased's share from their heirs. Alternatively, it might have to dissolve and distribute to the deceased's heirs their share of the business's assets. The operating agreement may specify that the deceased's heirs can inherit only their financial interest, not their management interest. In this case, the heirs would take over the deceased's share of profits, losses, and assets, but they could not participate in managing the business. Ultimately, when one member dies, the others must look to the operating agreement for guidance about the proper next steps.

If there is no operating agreement, or if the operating agreement is silent about what to do when a member dies, state law spells out what to do next. In some states, an LLC automatically dissolves upon a member's death, but most jurisdictions do not require a multiple-member one to dissolve when a member dies. In states that forbid an LLC member to transfer their management interest without the other members' approval, the member can leave only their financial interest to their beneficiaries in their will, thereby preventing the heirs from participating in the company. Some states permit the deceased's executor to take over the management interest to the extent necessary to settle the estate.

Your operating agreement's value extends far beyond the circumstances of an LLC member's death. An effective operating agreement is critical to the success and longevity of the company. If you are a member of a newly formed company, preparing an operating agreement is a critical first step to business success. An experienced attorney may be able to help you get started.

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.