BY MATTHEW J. LAPOINTE, ESQ. and ANTHONY D. BARTIROME, ESQ.
It is very common for a small business to be organized as a single-member limited liability company. The LLC affords liability protection to the owner without the formalities required by a corporation, such as annual minutes of shareholder and director meetings.
The owner of a single-member LLC owns 100% of the membership interests of the LLC. Membership interests of an LLC are a type of security, like stock in a corporation. Sometimes, LLC membership interests are represented by physical certificates, like stock certificates, but most of the time LLC membership interests are un-certificated.
When the owner of a single-member LLC dies, his or her membership interest, like any other security, may be transferred by his or her will. But relying on a will to transfer the LLC membership interest is not very efficient. It may take several months to navigate the probate process and then distribute the LLC membership interest to the heirs. Furthermore, the LLC’s business operations may be on hold during the probate proceeding, which is administered through the local court.
One way to avoid probate and to facilitate uninterrupted business operations is to utilize a “transfer on death” clause in the LLC operating agreement or on the LLC membership interest certificate.
The Florida Uniform Transfer-On-Death Security Registration Act (Florida Statutes Chapter 711) allows an individual to name a beneficiary of his or her LLC membership interest upon death in the same manner as an individual can name a “pay-on-death” beneficiary of a bank account.
For a single-member LLC, the operating agreement could state that the member’s LLC membership interest is to be transferred immediately upon death to a spouse, son or daughter, or other person. If there is no operating agreement, the membership interest could be certificated and the certificate issued to “X, transfer on death to Y.” The transfer-on-death beneficiary will own the business immediately upon death and will have the immediate right to control the affairs of the business.
In the case of a small owner-operated business, the ability to have a quick transition to a new owner can be of vital importance. Most of the value in an owner-operated business is in goodwill. If the business cannot be transferred quickly this goodwill tends to dissipate and the longer it takes the less valuable the business becomes. If the goal is to sell the business upon the death of the owner-operator, a transfer-on-death clause will greatly increase the chances of doing so for the best possible price.
The transfer-on-death clause would also be useful in a family business where a son or daughter works alongside a mother or father. The business owner could name the child as the transfer-on-death beneficiary. The parent would retain ownership and control of the business while alive and instantaneously upon the parent’s death ownership and control would vest in the child in a seamless transfer that avoids probate court.
The business attorneys and estate planning attorneys at Blalock Walters often collaborate to find the most efficient means of transferring business assets in the event of the business owner’s death. If you have questions about succession planning for your business, please call Matt Lapointe or Tony Bartirome at 941. 748.0100.