If the sole member of a single member limited liability company (SMLLC) established under Florida law dies, the SMLLC must dissolve and wind up its affairs unless the operating agreement provides for a different result. This is a huge reason why even a SMLLC should have an operating agreement – to avoid mandatory dissolution at the death of the sole member. Florida law allows for 90 days during which a successor member may accept member status and thereby preclude the SMLLC’s dissolution. Strict compliance with the applicable Florida statutes and any relevant terms of the LLC’s operating agreement are required. If there is no provision for a successor member, after lacking a member for 90 days, a SMLLC must wind up and terminate its existence.
Issues can be avoidable with a carefully drafted operating agreement or buy-sell agreement. There are provisions that could be included in the operating agreement even for a SMLLC. As an example, a provision admitting a successor as a member subject to the successor’s consent may be included in your LLC’s operating agreement, or a separate sale and purchase agreement may be used as discussed below.
Transfer-on-Death Clause in the Operating Agreement
Transfer-on-death (TOD) provisions are enforceable to pass an LLC membership interest to a successor member outside of probate. This may be so even if there are conflicting provisions in the deceased member’s will. It is important for the LLC member who wants to transfer their LLC membership interest and avoid probate in doing so to include the TOD provision in the LLC’s operating agreement and to confirm that the successor member wants to be the successor member. An LLC membership interest may confer benefits to the proposed successor member, but it can confer obligations too.
A TOD provision transfers the sole member’s full membership interest to the replacement or successor member automatically and immediately at the sole member’s death. With an operating agreement that provides for a successor member, the SMLLC will not lack a member and risk dissolution under Florida law.
Sale and Purchase Agreement
The LLC’s operating agreement may provide language whereby the deceased member’s estate or heirs have the right to receive the deceased member’s interest in the LLC. The operating agreement could require the LLC to distribute to the estate or heirs of the deceased member. Then using a separate agreement, it would require the designated successor member to purchase the deceased member’s membership interest in the LLC.
The separate agreement with the proposed successor member would require the sale and purchase to be closed within a specified period but no later than ninety days following the death of the sole member, address how the deceased member’s interest will be valued, cover the other terms of purchase, and provide who the manager of the LLC will be if the deceased member was also the LLC’s sole manager. The LLC’s ability to fund the liquidation and the funding method must be carefully considered. This would avoid the circumstance in which the estate or heirs of the deceased LLC member have an interest in the LLC but no ability to liquidate it.
To fund the sale and purchase, the agreement may specify that the sale price may be paid with cash or it may allow for an installment sale secured by the successor member’s LLC membership interest. If there is an installment sale, the payment schedule must be stated, and overall the agreement must follow the LLC’s operating agreement and the deceased member’s estate planning documents.
The Importance of Succession Planning
You now have an introduction to the burdens that failing to plan ahead will place upon family members and loved ones when the sole member of a SMLLC passes away. The solution that will work optimally for a SMLLC will depend on the unique circumstances of that member and the assets the LLC owns when the sole member passes away. Planning for the possibility of a sole member passing away (or becoming incapacitated) will go a long way to avoid or lessen problems so the fate of the sole member’s membership interest is not left to chance or the default provisions of Florida law.
Whether you are the sole member of a SMLLC or a member of a multi-member LLC, scheduling a conversation with one of our business attorneys will be the start for you to learn how you and your LLC may avoid problems when a member of the LLC passes away. Talk with one of our attorneys by contacting us at (813) 852-6500 to schedule a courtesy discussion.