Is “succession planning” in an operating agreement essentially a section that deals with the transfer of membership interest in the event a member wishes to sell their interest, dies, is declared incompetent or goes bankrupt?

If those events are covered, does the operating agreement “provide for succession?”

Or, does providing for succession involve more specifics as to what qualifications a new member must have in order to become a voting member versus an assignee?

– Laurie, Texas


Answer

Most “template” operating agreements have transfer of membership interest provisions that essentially state that if a membership interest is transferred involuntarily, the transferee does not have voting rights unless the other members agree.

A provision like the above gives the LLC charging order protection, and is an asset protection tool. There is some adverse caselaw (in the bankruptcy context) when single member LLCs try this technique. Advanced asset protection is a tricky area of the law, and prone to abuse.

As a general rule, once you start getting into the finer details of clauses in operating agreements, you really need to think about consulting an attorney.

Services like Legalzoom and their cohorts are excellent resources for routine filings such as setting up your LLC and acting as registered agent and even for giving you a template operating agreement.

When you get into asset protection and the like, you must consult an attorney. Drafting a complex contract based on what “some guy on the internet” told you is foolish–even if “that guy” is me!

My suggestion is that you use online services like Legalzoom to do the routine filings, and use the savings from that to hire an attorney to write a customized operating agreement for your LLC.

An LLC membership interest is an asset like a share of stock, and in that sense, upon the death of the owner, it will be distributed according to the decedent’s will (or in the absence of a will, via state law). What rights the person inheriting the membership interest will have in terms of control of the LLC, voting rights, the right to force distributions of profits and so forth, is determined by the operating agreement. That is where the asset protection issues discussed above come into play.

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