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SMALL BUSINESS' NEED AN OPERATING AGREEMENT WITH A SUCCESSION PLAN

Question: Under Florida law, if a member of my limited liability company dies, what are my rights if we did not have an operating agreement?

Answer: This question demonstrates the importance of establishing an operating agreement for your business that includes the appropriate succession planning.

Upon the death of a member of a limited liability company, which does not have an operating agreement, the executor, administrator or other legal representative may exercise all the member's rights for the purpose of settling the member's estate or administering the member's property, including any power the member had to give an assignee the right to become a member.

According to the Fla. Stat. Ch. 608.403, a limited liability company is subject to statutes and regulations of the law of Florida State for regulation and controlling its business. All members of a limited liability company may enter into an operating agreement, which need not be in writing to regulate the affairs of the limited liability company and the conduct of its business. To the extent, the operating agreement does not otherwise provide or the operating agreement has not been drafted, Fla. Stat. Ch. 608 will govern relations among the members, managers, and the limited liability company. Since the issue presented above deals with a situation where you do not have an operating agreement, Fla. Stat. Ch. 608 will govern.

A limited liability company shall furnish to the legal representative of a deceased member without demand, information concerning the limited liability company's business or affairs reasonably required for the proper exercise of the member's rights and performance of the member's duties. On demand, the limited liability company shall provide other information concerning the limited liability company's business or affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances.

Florida Courts have not discussed this particular issue; however we can look at the persuasive authority of the Ohio Supreme Court in Holdeman v. Epperson, 111 Ohio St. 3d 551 (Ohio 2006). In that case, the Court was asked to determine what rights an executor of the estate of a deceased member of a limited liability company is entitled to exercise.

Although in Holdeman, the limited liability company had prepared an operating agreement, which restricted the rights of a legal representative of a deceased member, the Supreme Court held, the operating agreement had violated the state statute referring to the rights of a deceased member of a limited liability company. That Court further held an executor of the estate of a deceased member of a limited liability company has all the rights that the member had prior to death, for the limited purpose of settling the member's estate or administering their property.

The assignee of a member's interest shall have no right to participate in the management of the business and affairs of a limited liability company except upon the approval of all of the members of the limited liability company. An assignment of a membership interest entitles the assignee to share in such profits and losses, to receive such distribution or distributions, and to receive such allocation of income, gain, loss, deduction, or credit or similar item to which the assignor was entitled.

Similarly, in Ott v. Monroe, 282 Va. 403 (Va. 2011) the Virginia Supreme Court held an assignee of a financial interest has no control interest in a limited liability company without becoming a member.

Assuming than an assignee has become a member of the company, the member has to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities, of the assigning member. An assignee who becomes a member also is liable for the obligations of the assignee's assignor to make and return contributions and wrongful distributions. However, the assignee is not obligated for liabilities, which are unknown to the assignee at the time the assignee became a member and which could not be ascertained from the articles of organization.

A limited liability company may also acquire, by purchase, redemption, or otherwise, any membership interest or other interest of a member or manger in the limited liability company. Any such interest so acquired by the limited liability company shall be deemed cancelled.

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