LLC ?
I am part of a 2 member LLC.
Can anyone lend some guidance on a "typical" structure, whereupon one of the members dies. I have been told the LLC can be the beneficiary of respective life insurance policies for each member. My question is how are the proceeds distributed to the LLC (remaining member) and/or the deceased members surviving spouse?
Any input would be greatly appreciated.
Thanks.
This type of insurance is called "key-man" insurance. It is designed to cover the costs of replacing the deceased partner. Not sure how useful that would be in a two-man deal.
Joe is right, your talking about key-man insurance.
As far as what happens when one member dies it is fairly simple, either you make a plan and write it into the operating agreement as to what is to happen to the persons ownership interest upon death or the state will probate it as just another asset the person owns.
Probate is a real pain, try to avoid it. We typically write into the operating that each member must file a written, notarized, document stating what they wish to have done with their share of the company. Additionally, our operating agreements are rather strict on preventing new members without the approval of all surviving members, in point of fact the ownership interest of any person is distributed equally to the remaining members if the person never filed a survivorship/inheritance plan, and if they did the remaining members must still accept the replacement or they have no rights to participate in the company despite their ownership. Likewise any successful action by an external agency to "reassign" someones ownership imeadiately triggers a clause that ejects the member and reassigns their interest to the remaining members. In short we are very strict in this regard to avoid any situation whereby someone not accepted by the company can become a participating member. Violations of the company standard result in an imeadiate loss of of ownership (they retain any balance in their capital account and this is distributed as the company is able so they do not lose money already earned).
You will probably want something less restrictive but I suggest the other members reserve the right to approve any new members and if someone is not approved they have no right to partcipate in the managment of the company.
Your also going to want a clause that covers appointment of a "gaurdian" or "custodian" for any members who might gain an interest and are under 21 or 25, etc.
I always suggest using an attorney for your operating agreements as there are many things that may not occur to you that should be placed in an operating agreement.
I also suggest searching the web for "LLC" and "operating agreement", this should provide some leads to actual operating agreements, ussually non-profits, to help you develop an idea of what some of the issues are. [ Edited by Mantis on Date 05/18/2005 ]
Yes KEYMAN Life Insurance is it!
You should note, however, the supreme purpose of this linsurance product is to insue persons who vitally contribute to the success of the entity.
The death benefit (money) insures the "ENTITY" against losses that could occur if that KEY person were to die.
Funds recieved by the business iare entended to help solidify the continuity of the business and provide funds to seek a capable replacement. Secondarily, funds would also help the business with interuptions caused by the deceased.