Benjamin Franklin is justifiably famous for many things, but one of them is this quotation: “In this world, nothing can be said to be certain, except death and taxes.”
Whether or not that is precisely true (I can think of a few other things that are certain in this world), it appears to be true that death is certain for all of us.
So, what if you’re the proud owner of a small business that has been formed as a Tennessee LLC, what do you do to make sure that your business not only survives you, but is set up to prosper for your family long after you are gone?
First things, first. Let’s take a look at what happens to a Tennessee LLC with only one member when that member dies if there is nothing set up or provided for in the LLC’s organizational or operating documents.
For all Tennessee LLCs that were formed on or after the effective date of the Tennessee Revised Limited Liability Company Act, that date being January 1, 2006, if there is nothing to the contrary in either the Articles of Organization or the Operating Agreement, then the personal representative of the deceased sole member of the LLC steps into the shoes of the deceased sole member upon his or her death and becomes the acting sole member of the LLC.
You can see a problem or two or three with this default rule for what most LLCs and their owners would want with respect to their companies. First, the deceased owner’s estate would need to be opened before a personal representative is appointed for the deceased owner’s estate. Unless that is accomplished almost immediately after the deceased owner’s death, there is a going to be a gap in time between the death of the owner of the LLC and there being someone in place to run the business. Second, it may very well be the case that the owner of an LLC may want someone appointed to act as his or her personal representative with respect to the estate and the deceased owner’s last will and testament, but not be the person designated to run his or her company, even for a short period of time. Lastly, since an LLC membership interest is personal property, the owner of an LLC may not want all of his beneficiaries that otherwise would share in his or her personal property from owning and running his business. Does the owner provide separately in his or her will for the ownership of the business after his death? Perhaps. But what if the business is the biggest and most valuable asset in the estate? Maybe the desire would be for all the beneficiaries to share in the economic value of the business, but not in the governance of the business.
You can see that business succession and estate planning for a small business owner can sometimes be a tricky business, no pun intended.
And the rules are different if the LLC were formed prior to January 1, 2006. In that event, it depends on whether the LLC were formed between July 1, 1999, and January 1, 2006, or if the LLC were formed prior to July 1, 1999. Without getting into the nitty gritty of the details of the Tennessee law as it has changed over the past 21+ years, suffice it to say that the key thing for all Tennessee LLCs with a single member is to have precise and carefully thought-through language in the LLC’s operating agreement for what the owner of the business wants to happen to the business upon his death.
One possibility would be for the sole owner of the LLC to provide that upon his or her death, a certain person or persons would automatically become members of the LLC, or that upon his or her death, the economic or financial interests associated with the membership interests in the LLC would automatically be vested in a certain person or persons but that the governance interests (i.e., voting and operating control) of the LLC would be vested automatically in a certain different person or persons. The important thing to make sure of is that the owner of an LLC doesn’t ignore the certainty of death and fail to provide for what he or she wants to happen upon death in the LLC’s operating agreement. And, of course, the owner’s last will and testament should not be in conflict with the operating agreement. You wouldn’t want such a conflict to cause uncertainty (and possibly litigation) after your death.
If you have an existing LLC of which you are the sole member, you should take time now to review your LLC documents and to make sure that you’ve provided for the contingency (make that the certainty!) of your death. After all, if you’re building a great business now, you want that great business to continue on in the future after you’re gone so that your family and loved ones are left with the legacy that you’ve worked so hard to build.