An LLC is a legal entity independent of its owners that is formed under state laws. Unlike in sole proprietorships or partnerships, the owners, or members, of an LLC can transfer their ownership interest to someone else. Since the company is independent of its owners, it can continue to operate even after an owner’s death, and the owner’s interest can transfer to a third party. If your LLC has an operating agreement, it may contain terms specifically permitting or restricting certain types of transfers.
Your beneficiary is the person you designate to inherit your ownership interest in the company. Beneficiaries are generally not restricted by state law, but your LLC’s operating agreement may restrict whom you can name as a beneficiary. The operating agreement, which is like a contract that governs an LLC’s operations, may even restrict whether your ownership interest is transferable at all. Some LLCs allow full transferability of a member’s share while others restrict transfers, limiting them to certain business reasons only.
If your LLC allows ownership interests to transfer, the operating agreement can identify each member’s beneficiary. Alternatively, you and other members can create transfer-on-death documents if permitted by your state’s laws. Many states have standardized the registration of transfer-on-death designations for transfers of business interests. When you transfer your interests directly to a beneficiary, your beneficiary steps into your shoes upon your death and holds the same rights you had.
Naming Beneficiaries in a Will
If your LLC’s operating agreement does not allow you to transfer your ownership interest, you can leave your interest to a beneficiary named in your will. If you die without a will, your state’s laws will determine who inherits your interest. The remaining members of the LLC can buy out your interest if your beneficiary wants to sell; your operating agreement may provide a price for the buyout. If your beneficiary wants to keep your ownership interest, the operating agreement may allow him to collect your share of the profits without giving him any right to participate in the management of the business.