When setting up an LLC, many business owners overlook key parts of their operating agreement. The LLC Operating Agreement is a document that serves as the foundation of your LLC’s internal operations, yet common gaps can leave you vulnerable to legal disputes and inefficiencies. Whether you are drafting your LLC’s first Operating agreement or reviewing an existing one, addressing these missing pieces can save you headaches.
This is the second in a series of articles on the subject of “What is Missing from your LLC’s Operating Agreement?” Each article will focus on a subject or subjects that often are not discussed at all in the LLC operating agreement or the subject gets little attention. In this second article of this series, we explore what may be missing from your LLC’s operating agreement and what you should include to improve it.
LLC Succession Planning
Many LLC operating agreements ignore critical events like an owner’s death, mental incapacity, or retirement. The discussion below focuses on the death of an LLC member; however, the same or similar considerations as discussed below will apply when an LLC member wants to retire or becomes mentally incapacitated. If unaddressed, these situations can disrupt the business or even lead to disputes among the remaining owners and the deceased member’s family. Without clear guidelines, heirs or third parties may inherit ownership, creating unforeseen challenges. Planning for these possibilities within the operating agreement can greatly enhance the probability of a smoother transition and protects the LLC’s business stability. Owners should outline how interests are transferred, who takes over responsibilities, and whether buyouts are required or are optional.
When an LLC member dies, will your LLC have clear plans to avoid disputes and business disruptions? Decide who will receive the deceased member’s ownership interest. Will a family member of the deceased member take over, or will the LLC have a plan to buy back that deceased member’s share? If the surviving members want to purchase the deceased member’s interest, will you have terms for how such a purchase will happen? Will the buyer pay in one lump sum payment? Will the remaining members need a payment plan? If an installment payment method is used, will your agreement include a timeline for payments and whether the unpaid purchase price will accrue interest and if so, at what rate? Will the plan stipulate that the remaining members will have time to secure financing, prepare to close the deal, and transition smoothly?
Planning for the unexpected is essential for any LLC, especially when it involves the death of a member. A well-thought-out LLC operating agreement can help minimize disputes and ensure smooth business operations during a transition. Without it, surviving members may face disagreements, delays, and strained relationships with the deceased member’s heirs. This can disrupt the business and halt critical decisions. Your agreement should outline who assumes the departing member’s duties and how ownership of their LLC interest will transfer. If the other members will have the option to purchase the deceased member’s share, clear terms should define the timing, payment method, and financing options. During this process, the LLC’s business must continue running without disruption. Addressing these issues at the start of the LLC can protect the LLC’s stability and greatly increase the probability for fair treatment for all parties involved.
When a family inherits a deceased member’s interest in an LLC, it can create challenges for the business. The new inheritors may have no knowledge of the LLC, its operation, or its goals. They might simply want to collect profits as passive investors, which can lead to issues for active members. If your LLC requires active involvement or decision-making, the situation could result in misalignment. Working with individuals you do not know or who lack shared goals may complicate management, communication, and progress. To address these potential problems, review your LLC’s operating agreement. You might want to include specific provisions about transferring membership or rights upon a death. This can mitigate future disputes or mismanagement that could harm the business. Without clear rules, you could face unwanted conflict or inefficiency, making it harder to maintain the business’s success. Even a single member LLC can benefit from an operating agreement by including provisions for the sole member’s interest to transfer upon death by operation of law and without the need for probate.
When an LLC is manager-managed, problems can arise if the manager dies, retires, or becomes incapable of continuing. The manager of an LLC functions much like a corporation’s president, and their absence can create uncertainty without clear succession rules in the operating agreement. If no guidance exists, questions emerge: Who steps into the role? Will a member take over, or will someone from outside the LLC be brought in? Florida law allows LLCs to be either member-managed or manager-managed, but both approaches have challenges if roles are not clearly defined. In manager-managed LLCs, a missing manager can delay decisions and confuse third parties, including lenders, about authority. Without a designated leader, third parties might demand unanimous approval from all members, complicating routine actions. Clear guidelines in the LLC operating agreement can prevent disputes and keep operations running smoothly during unexpected changes.
Having an operating agreement that includes a comprehensive succession plan, which you developed in advance of any member’s death, incapacity, or retirement, will significantly contribute to increasing the probability that your LLC remains stable and capable of continuing its operations smoothly into the future.
If you missed our first installment, read it here: https://strosslaw.com/whats-missing-in-your-llcs-operating-agreement-do-you-need-an-operating-agreement/. Please watch for our third installment in our LLC Operating Agreement Series coming in two weeks!
If you would like to speak with one of our Business Attorneys about how to write a business succession plan, please contact our office for a complimentary 30 minute phone consultation.
0 Comments