Hello, I'm Katherine Taylor, the lawyer for business owners. In a previous video, I explained that I would be doing a series of videos about operating agreement provisions. In that earlier video, I discussed what an operating agreement is and why it's important. In this video, I'm going to focus on one type of provision that most operating agreements should include — the clause that explains what happens to a member's LLC interest if that person dies.

An operating agreement is a contract among the members of an LLC. The members are the owners, and in a small company, the owners are usually the ones running the business. So if one of those members dies, what happens? If there is no provision in the operating agreement addressing what happens to that member's LLC interest, then — because the LLC interest is an asset — it becomes part of the person's probate estate and is transferred to that person's beneficiaries.

If those beneficiaries are the member's spouse or children, the surviving LLC members could suddenly find themselves in business with their former partner's spouse or children — which is generally not a desirable situation. To avoid this, the operating agreement can state, in advance, what should happen if a member dies. All members must agree to these terms, and most of the time they create a provision allowing the remaining members to buy out or otherwise acquire the deceased member's LLC interest. This ensures that the surviving members continue to own and operate the business together, rather than with a spouse or child who was not originally part of the business.

The operating agreement can therefore provide that the deceased member's interest will ultimately be transferred to the surviving members. This is just one of many reasons why having a strong operating agreement is critically important.

Questions? Please get in touch with us for more information.