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Update for Limited Liability Companies: What happens to Membership Interest when a Member Dies?

We blogged about the Virginia Supreme Court case of Ott v. Monroe. In that case, the Court ruled that when a father, in his will, assigned his majority interest in a limited liability company to his daughter, he only assigned a profit interest, not a control interest. Consequently, his daughter did not have the authority to “run” the company, absent the consent of the remaining LLC members.

In its 2013 session, the General Assembly modified the relevant LLC statutes in an attempt to overturn the Virginia Supreme Court’s decision. This blog post examines the new statute, and how it may impact your limited liability company.

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In the Ott v. Monroe case, the Virginia Supreme Court noted that pursuant to Va. Code Ann. § 13.1-1040.1, the death of a member acts to automatically dissociate that member from the LLC. Dissociation permits any assignee of the deceased member to only a “profit interest,” not the “control interest.”

Furthermore, the Court held that even if the LLC’s operating agreement stated an intention to “opt out” of automatic dissociation, “it is not possible for a member unilaterally to alienate his personal control interest in a limited liability company.” The Court relied upon the language in Va. Code Ann. § 13.1-1039 that, according to the Court’s interpretation, did not permit “the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member.”

The General Assembly modified the language of Va. Code Ann. § 13.1-1039 to permit the LLC’s articles of organization or operating agreement to remove any limitations upon the rights of the assignee. However, the LLC’s governing documents must clearly set forth the members’ intentions, or the members can find themselves in the same position as the parties in Ott v. Monroe.

In conclusion, for an assignee of an LLC membership interest upon the death of a member, and for that assignee to automatically have all the rights of a member, the operating agreement or articles of organization

1.   Must contain language stating an intent to opt out of the automatic dissociation provisions of Va. Code Ann. § 13.1-1040.1; and

2.   Must contain language conferring automatic membership upon an assignee without having to obtain approval of the remaining members.

Does your limited liability company’s operating agreement set forth procedures for dealing with the membership interests of a member upon death? You may not have reviewed your operating agreement since your company was formed. When in doubt, contact your experienced business lawyer to review your governing documents to make sure they accurately reflect your intentions.

Tarley Robinson, PLC,  Williamsburg, VA – Attorneys and Counsellors at Law

John Tarley

John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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