What happens when the last member of a limited liability company dies? Consider the following…
The conundrum…
When a corporate shareholder dies, the shareholder’s stock passes to the deceased shareholder’s heirs. All of a shareholder’s rights (e.g., right to vote and right to receive distributions) are “bundled” together. The heirs “stand in the shoes” of the deceased shareholder and they possess all rights and powers of the former shareholder. When a member of a New Jersey limited liability company (“LLC”) dies, the member’s heirs are in a much different position.
In the absence of appropriate planning, when a member of a New Jersey LLC dies, the member’s heirs acquire the deceased member’s right to receive distributions, but not the deceased member’s right to manage the LLC. In the case of a sole member LLC, the death of the member may leave the LLC without anyone empowered to manage the LLC—at least until such time as a legal representative of the deceased member is appointed and the representative designates a successor member who is willing to assume the responsibilities of being the LLC’s member.
Louisiana’s solution…
Under Louisiana’s recently amended LLC law, the death of the member of a sole-member LLC does not terminate or bifurcate the member’s interest. Instead, the interest of the member is “fully heritable.” Upon death of the member, the deceased member’s legal representative may exercise all of the deceased member’s rights for the purpose of settling or administering the member’s estate, including all financial and management rights. And, once the membership interest is properly transferred, as part of the succession, the heir(s) receives the full rights of membership in the LLC, including all financial and management rights. Insofar as many (if not most) members of LLCs fail to properly plan for contingencies such as death, Louisiana’s new “default rule” is a logical approach.
Conclusion…
Louisiana appears to have addressed a potentially major drawback of sole member LLCs. Until such time as New Jersey LLC law is similarly revised, it would be prudent for members of New Jersey LLCs—especially sole member LLCs—to plan for succession in the event of death. Please feel free to contact me if you would like more information about this development in LLC law or to discuss planning alternatives.
PLEASE NOTE: This blog is merely for the general interest of the reader. It is not legal advice or opinion and it does not create an attorney-client relationship. Please call me at 973-921-0600 if you’d like to have a free initial telephone consultation or learn more about me or my practice. Thank you.