L.B. Whitfield, III owned half of the voting stock in a business that had been in his family for generations. The other half had belonged to L.B.’s brother, who died and left the stock to a trust for the benefit of his son.
L.B. had four children, his son Louie, and three daughters. After his brother’s death, L.B. became concerned that the 50/50 voting balance might be disturbed if, after he died, his stock were to be divided among his four children. To prevent that from happening, L.B. created a manager-managed Alabama limited liability company to hold his half of the voting stock. L.B. was the sole member, and he and Louie were the two managers. His will provided that his interest in the LLC would pass to his four children in four equal shares.
After L.B. died, Louie continued as manager, and the four children were treated as members of the LLC, with each of them holding 25% of the interest in the LLC. About 10 years later, a dispute arose between Louie and his sisters, and the dispute escalated into litigation. Ultimately, the litigation was resolved on a theory that was not argued in the original pleadings and apparently did not even occur to the parties’ lawyers until several months into the case.
The Alabama Supreme Court noted that L.B. had been the sole member of the LLC and that, after he died, the LLC had no members. Although L.B.’s will gave his children equal shares of his economic rights in the LLC (his “interest”), economic rights in an LLC and membership are two different things, and the will did not make his children members. The Court further noted that, under the Alabama LLC statute, a limited liability company that has no members is dissolved and its affairs must be wound up, a process which includes payment of its debt and distribution of its remaining assets to the holders of interest in the LLC. Accordingly, the Court held that the assets of the LLC should be distributed in four equal shares to Louie and his sisters.
Interestingly, the Alabama statute provides a way that L.B.’s heirs could have become members and avoided the dissolution of the LLC, but they had to do it by mutual written agreement within 90 days of L.B.’s death, and there was no such written agreement.
How does one avoid that result altogether and ensure that the LLC will remain valid for subsequent generations of operation?
Thankfully the answer is fairly simple with just a little extra planning and effort.
To make sure the LLC remains valid, it is necessary to make sure and not only pass the economic benefits of the LLC membership interest, like in Whitfield, but to actually ensure that the beneficiaries become actual members, which is usually done via provisions in the LLC operating agreement.
Unfortunately, many single member, and even some multi-member, LLCs don’t have an operating agreement or have one that hasn’t ever been executed. If you are in that situation, or don’t know if you are, its important to check with a local attorney and they can usually help rectify the gap with only a little effort, but the benefits could be immense to the stability of your legacy that you’ve worked so hard to build.