The death of a member in a Limited Liability Company (LLC) can create immediate operational and legal challenges for the surviving owners. For a closely held, multi-member LLC, what happens next is determined by two main factors: the Operating Agreement and, if that document is silent, state law, which often forces the matter into probate.
The Operating Agreement is King
The most critical document governing an LLC's affairs, especially upon the death of a member, is the Operating Agreement. This contract among the members should contain a death of a member or buy-sell clause that predetermines the fate of the deceased member's ownership interest.
A standard provision in an effective Operating Agreement typically outlines a clear, multi-step process:
- Surviving Member's Option: The surviving member is given a limited timeframe (e.g., 90 days) to purchase the deceased member's interest from the estate (the spouse, heirs, or beneficiaries) at a pre-established or fair market value.
- LLC Obligation: If the surviving member declines the option, the LLC itself is then obligated to purchase the deceased member's interest from the estate at fair market value.
This legally binding mechanism is designed to ensure the business can continue operating smoothly without the surviving members being forced into a partnership with a non-contributing heir, such as a former partner's spouse.
The Perils of Probate
If the LLC does not have an Operating Agreement, or if the agreement is silent on the death of a member, the matter becomes a problem for probate court. The deceased member's ownership interest in the LLC then becomes an asset of their estate, subject to their will or state intestacy laws.
Under Texas Business Organizations Code Section 101.1115, a person who succeeds to the membership interest of a deceased member is considered only an assignee of the interest. This is a critical distinction:
- Assignee Rights: They are entitled to the economic rights (such as receiving distributions) associated with the membership interest.
- No Management Rights: They have no right to participate in the management or affairs of the LLC.
While this default law prevents an unqualified heir from making day-to-day business decisions, it creates significant strain. The surviving member must negotiate with the deceased member's personal representative to buy out the interest, often leading to protracted and emotional arguments over the valuation of the business. The result is a messy, expensive legal process that should have been avoided through proper planning.
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