Your LLC Could be Involuntarily Dissolved Without an Operating Agreement
When the sole member of a limited liability company (LLC) passes away without a clear operating agreement, state law may dissolve the company. This article explains the importance of an operating agreement in preserving your business and passing it on to your family.
I’ve worked with hundreds of small business owners over the years. Missing or unsigned operating agreements are not at all uncommon. For some reason, it’s one of those things the importance of which is commonly overlooked. For those who did a DIY business formation, they may have never had an operating agreement. That’s because the state does not require one to form an LLC. For others maybe they had one, but it’s been lost over the years or was never signed. An unsigned operating agreement holds no legal significance, akin to an unsigned Will.
No Operating Agreement = More Government Regulation
When you have no operating agreement, it’s like waiving your right to set the rules for your own business. The government has default rules that govern LLCs that can be overwritten by the terms of an operating agreement. Most business owners want less government regulation. If you have no operating agreement, you’re inviting more government regulation of your business. In particular, the government will dictate what happens to your business after you die. Here’s what the government’s rules say about what happens to your business if you die without an operating agreement.
Unless you have an operating agreement for the company which says something different, the law provides that the company will cease to exist within 180 days of your death. The law obligates the executor of your estate to wind up the affairs of the company, which generally means liquidating the assets of the company (e.g., selling equipment and collecting accounts receivable), paying the company’s creditors, and distributing any leftover funds to your estate. Do not assume that your executor or your heirs have the authority to continue the operations of the company, except as necessary to wind up the company.
Important Provisions for Operating Agreements
Consider creating an operating agreement for your company. The rules summarized in the preceding paragraph can be changed in the operating agreement. Many single member limited liability companies view an operating agreement as unnecessary. An operating agreement allows you to set rules for your business and specify post-death procedures, making the transition smoother for family, employees, and customers. In an operating agreement, you can:
Specify in the operating agreement that your entire interest in the company, including the authority to govern the company, may be transferred via your Will.
Specifically convey your ownership interest to one or more beneficiaries.
Require your executor to effectuate a transfer of your membership interest within the 180-day deadline set by law before your company is dissolved.
Convey your ownership interest to a trust so that trust is the member of the LLC. The trust, as member, never dies and eliminates the possibility of dissolution under the default rules.
Convey ownership interests to minority owners now so that after you die, the LLC is not without members.
Creating and signing an operating agreement is only one of many of the estate planning considerations for small business owners. You work hard to build your business. Do not let the government’s rules wreck your life’s work.
Protect Your Business – Create an Operating Agreement
Make sure you have a signed operating agreement that specifies what happens to your ownership interest after you die. Get it done the right way – with one of our experienced business attorneys. We provide that service on a reasonable flat-fee basis. It will be tailored to your business and your needs. Keep the government out of your business AND your estate plan. Contact us to get this crucial business document in place.