by Carol Warnick
What happens when the sole member of an LLC dies without making provisions for succession? Does the LLC automatically dissolve with the assets being forced to be distributed through the decedent’s estate? Alternatively, is there some way for the personal representative to save the LLC and to assume the position of the sole owner during the administration of the estate, thus allowing time to figure out how to handle the ultimate distribution of the LLC? When the decedent operates a viable business in a single member LLC, significant value can be lost to the estate if the LLC is dissolved upon the death of the sole member.
Those of us in Colorado are fortunate enough to be operating under a statute that give us some flexibility. Under Colorado law, if the operating agreement of the single-member LLC does not address the circumstances on the dissociation of the member the statute provides as follows:
7-80-701. Admission of members
(2) At any time that a limited liability company has no members, upon the unanimous consent of all the persons holding by assignment or transfer any of the membership interest of the last remaining member of the limited liability company, one or more persons, including an assignee or transferee of the last remaining member, may be admitted as a member or members.
There is no dissolution provided that the assignee appoints or becomes a member:
7-80-801. Dissolution – time and notice of dissolution
(1) A limited liability company formed under this article is dissolved:
(c) After the limited liability company ceases to have members, on the earlier of:
(I) The ninety-first day after the limited liability company ceases to have members unless, prior to that date, a person has been admitted as a member; or
(II) The date on which a statement of dissolution of the limited liability company becomes effective pursuant to section 7-90-304.
If 90 days have elapsed since the sole member’s death, the LLC dissolves, but it may be resurrected pursuant to 7-90-1001 and 1002 (note that the assignee has the power to act on behalf of the dissolved LLC (7-80-803.3(2)). (“The legal representative, assignee, or transferee of the last remaining member may wind up the limited liability company's business if the limited liability company dissolves.”) It could also wind up by merging with a non-dissolved LLC which may continue the business of the dissolved LLC.
This means that if we have an estate where the sole member of an LLC which is operating a business dies with no provision for succession, the statute not only provides a way to keep the LLC (and thus the business) alive until the ultimate distribution of the LLC interests, but it even allows for reinstatement of a dissolved entity should the personal representative not act quickly enough. This is a great advantage for personal representatives dealing with this particular situation in Colorado. A growing number of other states are specifically addressing the dissociation of the last member, similar to Colorado, but almost no other states permit the reinstatement of a dissolved entity in this manner.
(The author gives thanks to Robert Keatinge, her colleague here at Holland & Hart, for his insight and significant contributions not only to the LLC statutes in Colorado but for his assistance with the content of this blog.)