The first quarter is a great time to reflect on the accomplishments of the past year and plan for the year to come. Reflecting on past performance and planning for the challenges ahead is critically important for those who own and operate a small business.
Whether you are the sole owner or engaged with others in a limited liability company (LLC), it is crucial to the success and longevity of the business that you understand how and to whom your interest in the LLC will transfer upon your death.
This article will highlight the importance of planning for death as a small business owner engaged with others in an LLC.
All LLCs should have an operating agreement that sets out the governance and management provisions of the LLC. If an LLC does not have an operating agreement (or if the operating agreement is silent on a particular issue) then the Nebraska Uniform Limited Liability Company Act (the “LLC Act”) sets out the “default rules” or guiding provisions. Under the LLC Act when a member dies, they become “dissociated” from the LLC and their ownership interest in the venture passes to their heirs in accordance with their estate planning documents or by intestacy in the absence of any will or similar testamentary document.
The LLC Act dictates that subject to a few powers held by a personal representative during the administration of the deceased member’s estate, the “transferee”, the person receiving the deceased member’s interest in the business, will not be entitled to the management of the company or, in most instances, have access to records or other company information. In effect, the person receiving the deceased member’s interest in a multi-member LLC will only be entitled to the “economic benefits” of the organization such as distributions. Any distributions will, however, be at the discretion of the remaining members who may choose to reduce or forego distributions.
The powerlessness of the transferee member to engage in the management of the company or the direction of distributions may be contrary to the intended goals of the deceased member prior to his or her death. It is easy to imagine unintended scenarios where the remaining members pursue ill-advised business ventures or cease economically vital distributions to the transferee.
Planning for the death of a member is an essential part of business lifecycle planning. Upon the death of a co-member, management and economic entitlement questions can quickly become murky in the absence of clear and concise business planning documents. Implementing and continuously reviewing an operating agreement with provisions addressing the potential death of a member is one easy way to plan for the future.
Every small business owner or participant should ensure their business and estate planning documents are in lockstep to safeguard their loved ones from unintended consequences. If you have questions, please contact Alex Montoya at [email protected].