You started an LLC with some business partners a few years ago. Things have been going really well, and the business has been profitable for a while now, but you never quite finished that operating agreement. Then one day you’re riding an electric scooter to work and almost get side-swiped by an SUV. After you collect yourself (and after considering you family and friends), you might be struck with a terrifying thought – what would happen to my business interests if I were to die?

What’s in your Operating Agreement?

In an LLC, the operating agreement typically dictates what happens to a member’s interests when he or she dies or becomes incapable of serving in their current role. If an operating agreement is silent, state law will govern what happens. In some states, a LLC must dissolve upon the death or resignation of a member. In others, including Ohio, the executor of the deceased member’s estate has the power to determine what happens to the business interests. In order to avoid any unforeseen consequences, it is important to make sure that all potential consequences are considered, and that the member’s intentions are clear.

One way to handle this is to register a beneficiary of a will as a transfer-on-death designee for the deceased’s LLC membership interests. The Ohio Revised Code allows for this in The Uniform Transfer on Death Security Registration Act of section 1709. In this section, membership interests are explicitly listed within the definition of a “security.” The section further states that a beneficiary can be registered as a transfer-on-death designee for securities, including LLC membership interests. In order for this to be effective, the LLC operating agreement must specify that the membership interests of the deceased member are transferable upon death and are not subject to probate.

You can change the default rules in your LLC Operating Agreement

However, LLC operating agreements can always bypass most of the statutory rules. For instance, your operating agreement could have the membership interest pass to a next of kin, but the ownership interest become non-voting. Another popular option is to have the company buy out the deceased’s  membership interest from their estate. That illustrates one of the nice things about LLCs – you can structure things in the way that best work for the company and members.

A transfer on death designation ensures that the membership interests are passed down as the member wants, and often gives the member peace of mind in terms of how the interests are distributed after he or she is gone. If your business hasn’t yet drafted or finished its operating agreement or partnership agreement it’s important to speak with a knowledgeable attorney to ensure that both the agreement and the designation are set up correctly.

If you have any questions about operating agreements, contact us.