Operating Agreements That Prevent Probate Nightmares: Succession Clauses for LLCs When an Owner Dies
Oklahoma business owners may assume that forming an LLC keeps their business out of probate when they pass. However, that’s not always the case. If there aren’t clear succession provisions in the LLC’s operating agreement, your interest may still pass through probate when you die. This delays business operations and creates significant insecurity. Working with an Oklahoma estate planning attorney with experience in business succession needs can help you streamline this process.
At Entz Burton & Associates, we help business owners like you plan for the future every single day. Attorney Jeffrey Burton has extensive experience in both estate planning and business matters, putting him in the ideal position to protect your LLC. Learn more about how our estate planning law firm can help you now—call us at 405-773-9800.
What Happens to an LLC When an Owner Dies in Oklahoma?
When an LLC member dies, their ownership interest doesn’t always automatically transfer in a clean or functional way. Under Oklahoma law, there are both economic rights and management rights. Heirs may inherit the right to receive profits—economic rights—without automatically gaining management rights. As a result, death may lead to passive ownership: owners who receive profits from a business without the right to make actual decisions in the business. This leaves everyone else with a leadership stake in a difficult position.
Unless there’s clear guidance in the operating agreement, this split can lead to conflict at an already difficult time.
How Default Rules Create Problems
If an LLC operating agreement doesn’t directly and explicitly address succession, Oklahoma law will apply. These rules are a fallback that steps in when there are no other rules or agreements in place; they’re not a tailored solution that can meet all of the needs of your business.
Consider, for example, someone who passes away and leaves their business to multiple heirs. The heirs all have different thoughts about the future of the business, and without clear guidance in the operating agreement, it’s difficult for remaining members to know who has decision-making authority. In the meantime, the business flounders, and both day-to-day and important decisions are put on hold.
If you rely on default rules, you give up control over how your business continues after you pass away. By working with a business succession and estate planning lawyer, you can ensure that your wishes are protected.
Key Succession Clauses to Include in an Operating Agreement
There are several succession clauses that can protect your LLC after you pass:
- Buy-sell provision: A buy-sell clause specifies what happens to a deceased member’s interest. The LLC may have to purchase that interest or the interest may transfer to a designated beneficiary.
- Valuation clause: Value disputes are a common source of conflict after a member’s death. Your operating agreement should define how each member’s ownership interest will be priced.
- Funding mechanism: If a buyout is required, the big concern is funding that buyout. It’s fairly common for LLCs to use life insurance policies to fund buy-sell agreements, but there are other options you may want to look into.
- Admission of heirs or successors: Not all business owners want their beneficiaries to take a leadership role in the business. You can specify if you want your heir to join the LLC or simply receive the financial benefits of the business.
- Management continuity: This is particularly helpful if a deceased owner has an important role in the LLC’s operations. A clause that dictates who takes over can ensure that the business continues functioning after a member passes away.
Coordinating With the Estate Plan
Operating agreements aren’t the only important documents for LLC owners. The owner’s estate plan, created with the help of an estate planning attorney, should align with the LLC operating agreement. Review all documents on a regular basis to ensure that there aren’t discrepancies or inconsistencies that may cause issues down the line.
Plan for Your Business’s Future With Our Estate Planning Law Firm in Oklahoma
An experienced business succession and estate planning lawyer can give you peace of mind that you are prepared for the future. Let’s talk about your options and goals. Give us a call at 405-773-9800 or contact us online.
Attorney J. Michael Entz at Entz Burton & Associates is an experience lawyer in estate planning law, business formation and asset protection serving the families in Oklahoma City and Weatherford office.
