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How to Probate-Proof your LLC Interest

How to Probate-Proof your LLC Interest

Whether I’m working on a business transaction or assisting business owners with their estate planning, I always look at how the ownership of the LLC is structured. While many business owners have set up a revocable living trust in order to direct how their assets are managed and to avoid probate, it is common to find that their LLC interests have not been put into the trust. This means that even if everything else in the estate plan were done perfectly, the family would still likely need to open up probate to access and manage the LLC interests. Obviously, this is not ideal in any situation.

Fortunately, putting an LLC interest into a trust is often a simple and affordable solution. If the LLC is a single-member LLC, including an LLC owned by a married couple, the change can be made by signing an Assignment of Membership Interest and filing Articles of Amendment with the Arizona Corporation Commission. If there is more than one member, the operating agreement will control the steps necessary to transfer the LLC interest into the trust. Often there are provisions in the operating agreement allowing a member to make such a transfer. However, if there is no provision, or no operating agreement, the consent of the other members would be necessary to make the transfer. With either a single-member LLC or a multiple-member LLC, the operating agreement should be updated to reflect the change of membership. This is most often not a big change, and can be done by updating a Schedule which lists current members and their addresses. As a side note, if you do not have a written operating agreement for your LLC – get one!

Since I am a lawyer, I must include a few caveats. First, if the LLC is treated as an S-Corporation for federal income tax purposes, or could be in the future, it is imperative that the trust contain language necessary to qualify the trust as an S-Corporation shareholder in the event the business owner becomes incapacitated or passes away. Second, you want to make sure that the transfer of the membership interest is not prohibited in any financial or other agreements that have been entered into by the LLC. Third, I really mean it about the operating agreement – you really do need one, but I’ll save that for another blog post.

The Purpose of an LLC’s “Purpose”

The Purpose of an LLC’s “Purpose”

When forming your LLC, you may wonder the importance of specifying your company’s “purpose,” and may be tempted to provide a hasty response or use a generic phrase such as “any purpose authorized by law.” The reason defining your company’s purpose is important is because the actions that the members or managers may legitimately take on behalf of the company are limited by the company’s purpose as stated in the operating agreement. In a member-managed LLC, the unanimous approval of all members is required for a member to make a decision to undertake an action falling outside of the company’s purpose. Likewise, in a manager-managed LLC, all of the members must approve any decision or action of the manager that falls outside the scope of the company’s purpose.

When defining the purpose of your LLC, you want to be specific enough to place reasonable limitations on the actions of the members or managers, but broad enough that it does not impede the ordinary course of business for your LLC. Generally one or two phrases or sentences can provide a sufficient purpose for your LLC, such as:

  • Purchase and manage residential real property rentals;
  • Provide landscape services; or
  • Create custom artwork.

You can place more specific limitations within your purpose, but be sure you are thinking long-term. The LLC’s purpose as defined in the operating agreement can only be amended if all LLC members agree.

Putting a few minutes of thought into the purpose of your LLC is worth it to protect you and the other LLC members. In addition, just having the purpose conversation with the other LLC members can help facilitate important discussions to ensure everyone’s interests and expectations are aligned at the formation of the LLC.