What Happens to a Washington Single-Member LLC When the Member Dies?
If you own–or plan to start–your own business, it is important to consider the future probate implications of your business structure. For example, if you are a sole proprietor, your business essentially lives and dies with you. A sole proprietor is an unincorporated business with no legal existence separate from the proprietor. This means that when the proprietor dies, their estate is responsible for paying any final debts and expenses of the business. Any remaining business property is then distributed to the proprietor’s heirs or beneficiaries.
But what happens when a solo business owner decides to form a limited liability company (LLC)? An LLC is a business structure that offers liability protection to its owners. An LLC has members who own and usually manage the business as well. Under Washington law, an LLC can potentially have just one member, also known as the sole member.
The members of an LLC are similar to shareholders in a corporation. One key difference, however, is that the IRS regards the corporation as a separate taxable entity from its shareholders of a corporation (specifically, a traditional C corporation). An LLC, in contrast, is normally a “disregarded entity” for tax purposes. This means that in the case of a single-member LLC, the sole member reports any business income or losses on their personal income tax return (on Schedule C), as if the LLC did not exist.
Dissociation and LLC Operating Agreements
So what does all this mean if and when the sole member of an LLC dies? Under Washington law, the death of a member triggers their dissociation from the LLC. That is, they cease to be a member of the LLC. In a multi-member LLC, the remaining members continue to operate the business and typically will buy out the interest of the deceased member from their estate. But this does not work when there was only one member to begin with.
Ideally, even a single-member LLC will have an operating agreement. This is a legal contract between the members of the LLC–or in this case, between the sole member and themselves. This might sound ridiculous, but one reason to have an operating agreement for a sole-member LLC is to spell out what should happen when the member dies. If the member wishes to continue the business, they can name a successor member in the operating agreement. Alternatively, the sole member can detail the procedures for winding up the LLC’s affairs upon their death.
Keep in mind, Washington law automatically dissolves an LLC 90 days after the death of a sole member, unless there is some provision in place to appoint a successor member. So absent an operating agreement or similar instructions, the sole member’s estate will generally wind down and dissolve the LLC as part of the normal probate process.
Contact a Spokane Limited Liability Company Lawyer Today
A limited liability company can help protect both your business and personal assets. Our Spokane limited liability company lawyers will be happy to sit down and explain the potential benefits and drawbacks to you. Contact Moulton Law Offices, P.S., today to schedule a free consultation. We serve clients throughout the Spokane, Kennewick, and Yakima area.
Source:
app.leg.wa.gov/RCW/default.aspx?cite=25.15.265
