In Florida, owners of a Limited Liability Company are known as “members”.
The identity of these members is undoubtedly the most important factor in determining the culture and success of any given company.
For this reason, any change in the make-up of a company’s members could have lasting, and potentially detrimental, effects.
Unexpected changes to an LLC in Florida
Unlike the voluntary exit of a member, a member’s unexpected death comes with its own set of complications such as what happens to their interests in the company particularly when considering the involvement of heirs and family members.
The trick to understanding what happens to a member’s interest in a Florida limited liability company (“LLC”) upon their death is to remember that each member’s ownership/interest is divided into a management interest and a financial interest.
Florida statute 605.0602 states that an LLC’s member is dissociated from the LLC in Florida upon their death. But what does this mean exactly? And how does it affect the existence of the LLC? The following is a cursory examination into what happens to an LLC in Florida when a member dies:
When a member dies, their estate, as the case would be, loses ownership interest while retaining financial or income interest in the company. The transfer of this remaining interest and the survival of the LLC in Florida then depends on the number of remaining members and the terms of the company’s Operating Agreement.
You may recall from our prior articles that an Operating Agreement is not mandated in the state of Florida, but it’s exactly this reason why every LLC should have one – particularly single-member LLCs!
Without a properly drafted Operating Agreement, members and their families are at the mercy of Florida statutes to determine the rights of remaining members and heirs, as well as, the process of transferring any remaining interests. And oftentimes, these statutes do not align with the intentions of the deceased members.
Single-Member LLC in Florida
When a company only has one member, it is obvious that there will be no remaining member to take control of the company’s management upon the death of the sole member.
Without a properly drafted Operating Agreement (and corresponding estate plan, for that matter), the company’s future is uncertain.
Florida law permits the member’s estate 90 days to elect a replacement member unless otherwise stated in the Operating Agreement, of course!
Assuming there is no contrary provision in an Operating Agreement, the company has to carry on business during this time without a member, which can be impossible at times depending on the nature of the business.
If the estate cannot elect a replacement, then the LLC will be dissolved and not reinstated. Clearly, this is an unfavorable outcome for most thereby making the drafting of an Operating Agreement paramount.
Multi-Member LLC in Florida
When a member of a multi-member LLC passes away, the process is somewhat different because of the obvious reason that there are remaining members who own the company.
If there is no Operating Agreement delineating the process by which a deceased member may be replaced, Florida law requires that the deceased member’s economic interests in the company will transfer to their estate and be inherited in accordance with the deceased member’s Last Will and Testament (or through intestacy, as the case may be).
While the deceased member’s objectives of passing on any financial interests in the company may be achieved, any intention of passing on their management interest will not as the deceased member’s management interest is then evenly distributed among the remaining members.
This precludes family members from taking on any active role in the company which may be contrary to the wishes of the deceased member.
To ensure that both managerial and financial interests in a LLC in Floirda is passed on as intended by its members, a properly drafted Operating Agreement is absolutely necessary.
Within that Florida LLC Operating Agreement, it is important to include various provisions directing the process upon the death of a member. Some of these provisions may include:
- a clause related to the process of transferring each member’s management and financial interests upon their death;
- a clause specifically naming a person to whom such interests should be transferred such as a co-member or key employee;
- transferring members’ interests into a trust to govern ownership upon their passing.
Regardless of whether you are the single member of your company or one of several, it is important to ensure that your company will pass on as you wish after your death.
Leaving the transition of your business at the mercy of Florida statute may be detrimental to your estate planning and legacy objectives.
To ensure your company passes on in the manner you desire, be sure to consult your business law attorney to prepare or review your company’s operating agreement.
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