What Happens to an LLC When an Owner Passes Away in Ohio?
One issue that comes up in practice when you represent LLCs is the unfortunate death of an LLC member. This unfortunate situation can create a series of legal headaches and, in serious cases, can require the business be shut down and relaunched. One of the biggest issues will arise if there are only two members. When one passes away, there can be a deadlock in the business based on voting percentages and often times this results in impracticability and a need for court dissolution.
It pays to be proactive with your business and plan for the unfortunate reality that no one lives forever. Being preemptive and addressing what you want to happen in the event one of the LLC owners passes away can save you a major headache and a ton of money. If you are a business owner and want to talk through your continuity plan in the event a partner dies, call the corporate attorneys at Sawan PLLC today.
The Operating Agreement
We usually recommend including a provision governing this type of thing in the LLC’s operating agreement. As you’ll see by the end of this article, this may not be a panacea unless it is carefully drafted in accordance with Ohio state law. Consider this scenario. You are a business partner with someone and you both equally own the company with 50% of the outstanding LLC units each. If your partner passed away, what rights would an executor of his or her estate be entitled to exercise with respect to your LLC? Without planning for this, your partner’s passing could halt business operations and in some extreme cases, require a judicial dissolution of the entity.
Most operating agreements are going to discuss exactly what should happen in this situation. There’s no “one size fits all” provision so it’s important to consult with a business lawyer about your options and wishes. Perhaps the executor of the deceased member’s estate will become a successor in interest of that member only for purposes of winding up the entity. This might grant them the same rights as the deceased members or specifically authorize certain tasks such as settling debts and winding up the business. A court is going to look to the operating agreement to provide it guidance to the extent the party’s contemplated the possibility of the death of an LLC member.
Ohio Law and the Holdeman Case
Even if this provision is included in the operating agreement, however, peculiar things can result. For example, consider the Holdeman v. Epperson case in the Ohio Supreme Court. In Holdeman, it was provided in the company’s operating agreement that if a member were to pass away, the executor of their estate would become a successor in interest and step into the deceased member’s shoes. One small caveat created a long string of litigation that reached the highest court in Ohio. As you can imagine this is not only bad for business, but also was likely very expensive.
The appointment of the successor in interest was subject to the surviving member’s consent. In this case, however, consent was withheld by the surviving member. This created an impasse in the ability to proceed and required extensive litigation. The case is one of the best examples of why you should meet with an experienced corporate law attorney when drafting an LLC operating agreement to make sure there are clear rules to ensure a seamless passing of an LLC member. It’s probably not the best idea to leave the future of the business to one partner’s consent as to what happens. But even having the best operating agreement in the world may not always provide a clear solution and the Holdeman court is illustrative of this specific point.
Successor LLC Members Under Ohio Law
Under Ohio law, you can generally expect that the provisions of your LLC operating agreements to be followed by a court. Typically, once an operating agreement is reviewed and it appears that the terms of the contract dictate the status of the parties, the inquiry ends because the court should generally presume the intent of the parties to a contract resides in the specific language they chose to use in the agreement. We recommend detailed, specific and unambiguous procedures for exactly what will happen when a member passed away. This is essential and most States will apply the common legal principle that when terms in a contract are unambiguous, courts will not in effect create a new contract by finding an intent not expressed in the clear language employed by the parties. In Ohio, however, there are specific state laws that are seen to preempt certain things in an operating agreement and give rise to instances where a court will not apply the operating agreement in lieu of a conflicting Ohio state law.
Ohio has a conflicting state law specifically governing what happens in cases where a LLC member has passed away. R.C. 1705.21(A) provides, “If a member who is an individual dies or is adjudged an incompetent, his executor, administrator, guardian, or other legal representative may exercise all of his rights as a member for the purpose of settling his estate or administering his property, including any authority that he had to give an assignee the right to become a member.”
Since the company’s operating agreement in Holdeman required consent before someone could become a successor in interest, the Ohio Supreme Court ultimately held that consent being withheld reflected a conflict with this statute. As such, no provision in an operating agreement that doesn’t at least provide the ability for the LLC member’s executor, administrator or guardian to exercise their rights for the purpose of settling the estate is probably not going to be enforced. Leaving it up to the remaining surviving member to determine – even if explicitly in the operating agreement – would not be enforced under this holding.
Practically, this means that Ohio state law is going to set a baseline set of rights for all LLC members. Those rights include the ability to have a legal representative of a deceased member to exercise that member’s rights but only for a fairly narrow purpose. The operating agreement can certainly gloss over this baseline right with more specificity. Ultimately, an operating agreement that falls below the statutory baseline will probably not be upheld. Careful drafting of your operating agreement can help avoid this issue entirely. That is why we recommend you hire experienced corporate counsel to help make sure your operating agreement covers this peculiar, but potentially devastating, aspect of Ohio corporate law.
Contact A Business Attorney to Discuss Your Business
There’s certainly quite a few more important aspects where continuity after the death of a partner can affect your business. It often depends on the type of business you are in and the unique relationship between the partners. If you’d like to find out more and have a business lawyer from our team provide more narrowly tailored insight based on your business, give us a cal today at 419-469-5002.