Your business partner and fellow Georgia LLC member just died. Now what? In addition to grieving the loss of a friend and business associate, you will need to consider what happens to your LLC when an LLC member dies. As a Georgia business law and estate attorney at Durden & Mills, PC, I have seen firsthand how the death of a member of a Georgia LLC can create difficulty for the surviving member(s). So what happens when an LLC member dies? As with most questions in the world of LLC’s, the answer is it depends on the terms of the operating agreement.
What Does the Operating Agreement Say?
In my previous post, “Does My LLC Need An Operating Agreement“, I detailed the reasons why your multi-member Georgia LLC should have a written operating agreement prepared by an experienced business law attorney. As I stated in that post, I believe that the most important reason for having a written operating agreement is that it can provide clear, efficient mechanism for resolving both disputes and ownership of the LLC in the event of one of the dreaded “Four D’s‘”: (1) Death, (2) Disability, (3) Divorce, and (4) Disagreement.
A well-written operating agreement should clearly address what happens to the membership interests of LLC member in case of any of the “Four D’s.” In the case of death of an LLC member, your LLC’s operating agreement likely should include a repurchase right in favor of the Company or other buy-sell mechanism to allow the surviving members to purchase the deceased member’s membership interest. Providing for repurchase of a deceased member’s interest in the LLC’s written operating agreement avoids the confusion and delay caused by the death of a member and ensures continuity of operation during an already difficult time.
In addition to providing for a repurchase of the deceased member’s interest, a well-written operating agreement should clearly state that the LLC continues its existence despite the death of a member. For LLC’s formed prior to July 1, 1999, the death of a member may cause an unintended dissolution. See O.C.G.A. 14-11-601 and 14-11-602(a). Even for LLC’s formed after July 1, 1999, the operating agreement should state that the LLC continues despite the death of the last remaining member. See O.C.G.A. 14-11-601.1 and 14-11-602(b).
Here’s the bottom line: when an LLC member dies, the LLC or the surviving members should have the right to buy the deceased member’s interest, and the surviving members will have that right so long as it is included in the LLC’s written operating agreement.
Unfortunately, many Georgia business owners fail to prepare an operating agreement for their multi-member LLC or try to prepare an operating agreement without the assistance of an experienced business law attorney and do not include a repurchase provision for when an LLC member dies. In this situation, what happens when an LLC member dies?
No Operating Agreement or “Silent” Operating Agreement
In the absence of clear repurchase rights set forth in a written operating agreement, a deceased member’s LLC membership interest passes into the estate of the deceased member. From there, the LLC membership interest will be distributed out of the deceased member’s estate as directed by the deceased member’s will or, if the deceased LLC member dies without a will, as directed by Georgia law. In either case, the deceased member’s LLC membership interest likely will pass into the hands of his or her spouse, children, or other family members!
Disaster can result when a deceased LLC member’s membership interest passes through the deceased member’s estate. Like all relationships, business partnerships are intensely personal – people go into business together because they trust one another and value the other’s unique skills and expertise. When an LLC member dies, however, the surviving LLC member may unexpectedly find themselves in business with the deceased member’s family or friends, and the new member(s) may have their own ideas about how the LLC should run!
In order to avoid this potentially disastrous outcome, your LLC’s operating agreement should clearly address what happens when an LLC member dies. In most cases, your LLC’s operating agreement this means that your LLC’s operating agreement should include a repurchase right in favor of the LLC or its members upon the death of any member!
If you have a question about what happens when an LLC member dies or would like to discuss operating agreements or any other business law question, please contact the experienced probate and business law attorneys at Durden & Mills, PC today for a free consultation. Call us at (706) 543-4708.