Some states require that a limited liability company (LLC) have at least two members. Many states, including California, allow for single member LLCs. Another jurisdiction that permits a single member LLC is Alabama. The LLC law of California and Alabama provide that when the single member dies, the LLC must be dissolved, subject to two exceptions. First, the single member LLC can continue if the operating agreement provides for the continuation and a method for determining the successor(s) to the deceased member. Second, the LLC can continue if the assignee(s) of the interest of the deceased members elect to continue the business within 90 days of the death. Recently, in L.B. Whitfield III, Family LLC v. Whitfield, the Supreme Court of Alabama dealt with the dissolution of the single member LLC.
In this case, the single member of an Alabama LLC died, and left his interest in the LLC to his four children. There was no vote to continue the LLC, and no special provisions in the operating agreement. Still, the children operated the business for 10 years after their father’s death. The four children began to have business disputes and one child (the manager) filed a lawsuit against the other three children. The three defendants discovered the Alabama law that dissolves a single member LLC unless the majority of the heirs agree to continue the business within 90 days. The three children then sued for a court order that the LLC distribute its assets to the members because the LLC was statutorily dissolved 90 days after the father’s death.
Despite the defenses offered by the plaintiff, the court held that the three children were correct, and that the LLC was dissolved when the children failed to continue the business within 90 days after the father’s death. The Supreme Court of Alabama said it did not matter that the LLC continued to operate for 10 years. The court highlighted that the fundamental principles of an LLC include membership admission through a written agreement that is signed. Since this new agreement was never established, the LLC was dissolved.
Caution: If a California resident dies his or her membership interest may be subject to an expensive and time-consuming California probate. To learn about nasty California probates and how to avoid a California probate and save your loved ones mega-bucks read “Trusts Should Own Valuable LLCs to Avoid Probate.”
For more on this topic see “What Happens If the Sole Member of a CA LLC Dies?“