What Happens to an LLC When a Member Dies?

By Holly Cameron

An LLC, or limited liability company, can have any number of members who own a share in the company. When a member dies, his share of the company passes to his beneficiaries and is distributed along with the rest of the member’s estate according to his will or state's inheritance law. The effect on the LLC depends on the terms of the LLC’s operating agreement and the laws of the state where it is registered.

Operating Agreement

The members of most LLCs enter into an operating agreement to regulate the internal affairs of the company. A well-drafted operating agreement sets out what happens to the LLC if the member dies. For example, the existing members may have the option to buy out the deceased member’s share at the market value. Alternatively, the operating agreement may provide that the LLC shall be dissolved if any member dies.

State Law

If there is no operating agreement, or if the operating agreement is silent regarding the death of a member, state law determines the effect of the death of a member on the business. In some states the LLC may dissolve automatically if a member dies. In others, the deceased member’s executor takes over his membership. For example, Section 1705.21 of the Ohio Code states that if a member dies, his executor or legal representative can exercise his membership rights with the aim of settling his estate.

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Membership Rights

A member of an LLC has various rights, including a right to take part in managing the business and a right to share in the profits. If that member dies, his executor may be allowed to share in the profits but not to participate in running the business. For example, Section 10-32-30 of the North Dakota Limited Liability Company Act provides that upon the death of a member, his representatives retain his financial rights but lose all rights to take part in governing the LLC.

Single-Member LLCs

A limited liability company can be formed with just one member. Obviously, if that member dies, the company becomes owner-less. It is a matter of state law whether the LLC dissolves automatically or whether the ownership transfers to the member's heirs. For example, the Nevada Revised Statutes provide in NRS 86.491 that if the sole member of an LLC dies, the member’s interest passes to his heirs under his will or state laws. In this situation, it is up to the heirs to decide whether to continue with the business or to apply for dissolution under state law.

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References

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