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Transfer on Death of Ownership of a Limited Liability Company

Transfer on Death of Ownership of a Limited Liability Company

Table of Contents

By Jeff Wagoner, W M Law President

 

When we do an estate plan, our #1 goal is to try to accomplish what you want with your estate while simultaneously avoiding probate.  Sometimes, we just can do both, but that doesn’t keep us from trying.  So, we really look hard to find new ways to avoid probate – we call those “probate avoidance mechanisms.”  Some of the most common probate avoidance mechanisms are “Transfer on Death” designations.  You can designate a beneficiary to receive title to your motor vehicle in both Kansas and Missouri simply by filling out the “TOD” block on your title application.  You can transfer the title to your home or other real estate by using a “Beneficiary Deed”, which is also known as a “Transfer on Death Deed”.  But, what about your ownership interest in a limited liability company?  Well, that’s not quite so cut and dry, or at least it isn’t quite so easy.  The first thing we look at with a limited liability company (“LLC”) is the “Operating Agreement.”  You may have owned an LLC for a long time, and still have absolutely no idea what an Operating Agreement is.  No worries, because frankly, lots of LLC owners either don’t have an Operating Agreement for their LLC or even know what it does.

When you create an LLC, most states require only a minimum of paperwork.  You log into your state’s “secretary of state” website and hunt down the “business services” link.  You’ll normally find a link to a form that you fill out to create a LLC.  It has some basic questions you must answer, like your name, address, email address, and the name you’d like to call your company, and who will be your registered agent for service of process, etc.  Then, you pay a fee and the website spits out an impressive, official-looking document called “Articles of Organization”.  With that, you can go to the IRS website and instantly get an Employer Identification Number (EIN) for your business (kind of like a Social Security Number for a person).  With an EIN, you can open a bank account for your LLC.  And then, you’re off and running!  Heck, who needs an Operating Agreement?!

Well, the Operating Agreement for your LLC controls how it is run, and is the equivalent of Bylaws for a corporation.  Your Operating Agreement can show things like who the owners and managers are of the LLC and what their powers are.  We’ve got a couple of different “canned” versions of an operating agreement that work pretty well, but there are always some adjustments that need to be made depending on the business being conducted by the LLC and the particular needs of the owners.  One of those needs can be to set up a “transfer on death” provision of one or more of the members’ ownership rights.  If you are a single owner LLC, it’s pretty easy to create a transfer on death provision any way you want it.  If you have more than one owner, though, it might get tough.  For example, let’s say you and your best friend each own 50% of an LLC.  You guys get along great.  But, your business partner has a child who is a lazy, no-good, shifty, yellow-bellied, lying, cheating . . . well, you get the idea.  That child is trouble.  But, let’s say your partner comes to you one day and says “When I die, I want that child to inherit my 50% of the company.”  OK, but if you allow that, you’re going to have a nightmare for a business partner.  You might want to craft a “buyout provision” instead of allowing a transfer on death to occur.  The bottom line is that it is possible to do a “transfer on death” for an LLC, but it isn’t guaranteed when you have partners.

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