Law News and Tips

LLCs and Probate

Fred Vilbig - Thursday, September 29, 2016

We recently ran into an estate where the decedent (a successful business man) had created an LLC, transferred an asset into it, and ran the business through the LLC for several years. He had done his estate planning and had a trust, but it turns out that he never actually transferred the business into the trust. The reason was that he never completed the process of organizing the LLC.

A Little LLC Law

There are two steps you have to take in order to set up a limited liability company in Missouri. The first step is filing articles of organization. This is kind of a public notice sort of thing. You declare that you (the “organizer”) are setting up the LLC. You say what its name is. You state the purpose of the LLC, which can be very general. You say whether it will be managed by the members (kind of like partners) or a manager (kind of like a president). You say how long it is going to exist (LLCs can actually exist for only a limited time, although most are perpetual). And you name an agent who is the person to contact on behalf of the LLC.

That is only the first step. These articles say nothing about who owns the LLC or how it will operate (besides just saying whether it will be managed by a member or a manager).

The second step is the operating agreement, which is kind of like corporate bylaws. Missouri law says that the member(s) of an LLC “shall” adopt an operating agreement. The law does not provide a specific form and generally leaves the contents of the operating agreement up to the LLC members, but especially with a “manager-managed” LLC, certain things need to be covered.

For instance, here are some of the things that are generally covered in an operating agreement:

  • the members should be named;
  • the members’ profit interests should be stated;
  • the agreement should state how the managers are elected or appointed;
  • the agreement should state how the members (if more than one) will vote on company business; and
  • the agreement should state whether the LLC is taxed as a partnership or as a corporation, if that is important to the members.

 

One other topic that is generally covered by an operating agreement (which is very important for our purposes) is to say what happens to the ownership of the LLC upon the death of a member.

The Incomplete LLC

In the case of our case, the decedent had filed the Articles of Organization for the LLC. He named the LLC; he designated himself as the agent; he gave it a general purpose; and he said it would be managed by “managers.” Although unrelated to the operating agreement question, it clearly looked as if the business property was owned by the LLC based on a title certificate that the accountant has sent to us.

There was a loan from on the business asset, so I thought the bank might have had an operating agreement. It wasn’t in the material that they sent over. The accountant didn’t have an operating agreement, either. That led me to believe that no operating agreement was ever created for the business. This is not unusual when people set up their own LLCs, although it does create some complications.

Probate

What this means is that we had a little bit of an unusual situation on our hands. The LLC was sort of in limbo, and there was a bank loan still outstanding on it. This could cause some concern on the part of the bank, and they could have decided to call the loan. Since the business asset generated a nice stream of income for the surviving spouse, I thought they would want to keep it.

In that case, they were going to need to probate the LLC membership interest. The problem we had was that we didn’t have any documents evidencing what that interest was. It looked as if part of what we were going to need to do was to write an operating agreement. We then were going to have to talk to the Probate Court about how they wanted us to handle this. An operating agreement would have made things a lot easier and probably avoided probate.

 

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