When someone forms a limited liability company (LLC), they usually have a specific vision for the company's future. But what happens if the sole member, or owner, of an LLC passes away unexpectedly? The answer to that question depends on the terms outlined in the LLC's operating agreement and the laws of the state where the LLC is formed. Below, we'll discuss what happens when the sole member of an LLC dies in California.

Dissolution of an LLC in California

Under California law, an LLC will dissolve upon the occurrence of certain events, including the death of the sole member. The dissolution process is outlined in Section 17707.01 of the California Corporations Code and provides that the LLC must wind up its affairs upon dissolution, including liquidating its assets and settling its debts and obligations. Any remaining assets will then be distributed to the LLC's members or, if the LLC has already been dissolved, to its former members.

If the operating agreement does not address what happens in the event of the sole member's death, or an operating agreement was never established, California law provides default rules for distributing the deceased member's interest in the LLC. The Corporations Code provides that an LLC operating agreement may provide for the transfer of a deceased member's interest in the LLC to their heirs, executors, or personal representatives, such as a distribution of an LLC interest to the beneficiary of the member’s trust. The Code also provides that, if the operating agreement is silent on this issue, or again, there’s no agreement to begin with, the deceased member's interest in the LLC is treated as personal property and passes to their heirs or beneficiaries under California law.

LLC as Personal Property in an Estate

If an LLC does become personal property of a decedent’s estate and it’s not in trust, then the value of the LLC is included when determining whether probate is required, which, as a reminder, is any real property regardless of the value, or a gross estate value of $184,500. Thus, if we have a high-value LLC, then probate may be required to either wind up the LLC and distribute the assets or distribute the LLC itself.

Read more: How to Settle an Estate in California | When is Probate Required?

Transfer of Ownership Interests

If the LLC's operating agreement provides for the transfer of ownership interests, the executor, trustee, or personal representative of the deceased member's estate may be able to transfer ownership of the LLC to a new member, such as a family member or another individual or entity. This transfer of ownership can allow the LLC to continue operating without interruption. However, if the operating agreement does not allow for the transfer of ownership interests or if the deceased member's estate does not have a suitable candidate to take over ownership of the LLC, the LLC may need to be dissolved.

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Dissolution of an LLC in California

If the LLC needs to be dissolved, there are certain steps that must be taken to wind up the LLC's affairs. These may include:

1. Settling debts and obligations: The LLC's debts and obligations must be settled before any remaining assets can be distributed. This may involve paying off creditors or negotiating with them to settle the debts for less than the full amount owed.

2. Liquidating assets: Once the LLC's debts and obligations have been settled, any remaining assets must be liquidated. This may involve selling property, such as real estate or equipment, or distributing cash or other liquid assets to other members of the LLC or the decedent’s estate if they were the sole member.

3. Filing dissolution documents: Once the LLC's affairs have been wound up, the LLC must file articles of dissolution with the California Secretary of State. This formalizes the dissolution of the LLC and puts the public on notice that the LLC is no longer in operation. You can do this online, fairly easily.

4. Tax obligations: The LLC may have tax obligations that need to be settled before it can be dissolved. This may include filing final tax returns and paying any outstanding taxes owed.

Read more: Credit Card Debt After Death: Who's Responsible?

Seeking Professional Guidance

The process of dealing with the death of the sole member of an LLC can be complex and confusing. It's important to consult with an attorney with experience in California business law and estate planning to navigate the process. An attorney can help you understand the legal and tax implications of the sole member's death and provide guidance on the best course of action for the LLC. An accountant or tax professional may also be necessary to handle the accounting and tax reporting.

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