Single Owner LLC, Analytical comparison between Saudi System and US system.

Citation: Lauren Routhier, Single-Member LLCs: Planning for Incapacity and Death, 85 Hennepin Law. 18, 18 (2016) Provided by: <br>SMU Underwood Law Library

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DEATH AND TAXES

Single-Member LLCs: Planning for Incapacity and Death

By Lauren Routhier

Many small business owners form their businesses as single-member limited liability companies (LLCs). These companies provide sole business owners with multiple benefits, including liability protection, favorable income tax treatment, and flexibility in operation. While no special planning needs to be done to transfer a single-member LLC at death-LLC interests are intangible assets that usually pass according to the sole owner's estate plan, or by intestacy in the absence of an estate plan. The absence of a written succession plan can lead to disaster for business operations if a sole LLC owner becomes incapacitated or dies.

Minnesota recently passed legislation governing LLCs. As practitioners update their clients' corporate governance documents in light of the new law, there is an opportunity to address management succession in a single- member LLC in the event of the sole member's incapacity or death.

The adoption of the new Minnesota Revised Uniform Limited Liability Company Act (MRULLCA), Minnesota Statutes Chapter 322C, effective on August 1, 2015, creates an opportunity for lawyers to discuss LLC succession planning with their clients. All new Minnesota LLCs must now be formed under the MRULLCA. On January 1, 2018, the MRULLCA will apply to all Minnesota LLCs. Until then, LLCs formed before August 1, 2015, will continue to be governed by the "old" LLC statute, the Minnesota Limited Liability Company Act (MLLCA), Minnesota Statutes Chapter 322B, although LLCs may elect to be governed by the MRULLCA at any time prior to January 1, 2018. Over the next two years, lawyers should update the governance documents for LLCs formed prior to August 1, 2015, to comply with the MRULLCA and may revisit their clients' single-member LLC succession plans at the same time.

Under both the MLLCA and the MRULLCA, statutory defaults govern an LLC's operation in the absence of a contradictory operating agreement or member control agreement.

The MLLCA generally contemplated a single management structure, in which a board of governors managed the LLC. By contrast, the MRULLCA allows for board-managed, member-managed and manager-managed

governance structures, but provides for a default member-managed structure in the absence of an operating agreement that elects otherwise.

Under a board-managed LLC structure, the sole member of a single-member LLC typically appoints him or herself sole governor. In the event of the sole member's incapacity or death, there is no default statutory mechanism for appointing a new governor of the LLC. The member-managed and manager-managed structures create the same potential issue in the event of the sole member's incapacity or death.

If the sole owner of an LLC governed by the statutory defaults becomes incapacitated or dies, there will be no successor with authority to manage the business's affairs and, depending on the circumstances, statutory dissolution of the LLC may be triggered. In the best case scenario, the sole member's attorney-in-fact, conservator, or trustee would step in to manage the business in the event of incapacity, and the sole member's personal representative or trustee would manage the business in the event of death. However, even in the best case scenario, the continued viability of a business may be in jeopardy where the attorney-in-fact, conservator, personal representative, or trustee is not the right person to carry on business activities.

In order to provide business continuity, LLC operating agreements should address who will take over LLC operations in the event of the sole member's incapacity or death. This gives the sole member flexibility to name one person to handle estate administration and another to

carry on the business. Appointing a successor is especially important where multiple people will inherit an interest in a single-member LLC. The successor is able to operate the business during the pendency of the estate administration, which gives new owners time to negotiate a new operating agreement without jeopardizing business operations.

The operating agreement should also define what qualifies as the sole owner's incapacity, which in turn would trigger the successor's assumption of authority. In addition, the operating agreement should detail the extent of the successor's authority The operating agreement may also anticipate the potential for multiple LLC owners in the event of the sole member's death. For example, the agreement may provide a mechanism for electing a new board or manager if the LLC becomes a multi- member LLC.

Practitioners should not rely on existing member control agreements for single- member LLCs created under the MLLCA or on the default statutory provisions under the MRULLCA without evaluating whether the MRULLCAs default statutory provisions adequately address their client's business goals in the event of incapacity or death.

Lauren Routhier [email protected] Ms. Routhier is an estate planning associate in the Tax, Trusts & Estates division of Stinson Leonard Street where she helps individuals and families meet their personal, business, and philanthropic goals through comprehensive estate planning.

18 HENNEPIN LAWYER MARCHAPRIL 2016