What happens to your share of the business

What the statute does if you do nothing

For a limited liability company, the statutory default on a member's death is unforgiving in a specific way. The member is dissociated automatically. What passes to the estate is a transferable interest: the right to receive the distributions the deceased would have received, with no vote, no management role and no general right to see the company's records.

So your family is left holding an asset they cannot sell, cannot control, cannot value easily, and cannot force anyone to buy — while the surviving owners decide when, and whether, distributions are made. Nobody chooses that outcome. It is what arrives when nobody chose.

The rule exists for a good reason: it stops a closely held business acquiring a co-owner it never agreed to. You relied on that protection when you thought about your co-owner's family. The point of succession planning is to keep the protection and remove the unfairness.

The sentence that makes planning possible

The statutes say plainly that the operating agreement governs relations among the members, and that the statute applies only to the extent the agreement does not. Arizona puts it in the strongest form there is: where the agreement and the chapter conflict, the agreement governs.^{Source 1Source 2}

This is why every conversation about business succession begins with the operating agreement rather than with the will. A will can only dispose of what you own. It cannot give your family rights inside a company that the company's own agreement withholds from them.^{Source 1}

There are limits — each statute lists provisions an operating agreement may not vary — but the matters that decide what happens to a deceased owner's interest are not among them. This is a decision the owners are allowed to make, and most never do.

The decisions worth making now

1. Does the interest get bought, or inherited? A buy-sell provision obliges the company or the surviving owners to purchase a deceased owner's interest, and obliges the estate to sell. It converts an unsellable minority stake into a claim for cash, which is usually what a family actually needs. The alternative — the family stays in as owners — can be right where they work in the business and wrong where they do not.
2. At what price? Decide the valuation method now, in writing: a formula, a stated multiple, a periodic agreed value, or an appraisal process with a named tie-breaker. Leaving it to be negotiated later means negotiating it at the worst moment, between a grieving family and a business under strain.
3. With what money? A buy-sell obligation nobody can fund is a promise to litigate. Life insurance on each owner's life, owned either by the company or cross-owned by the others, is the ordinary answer. Review the amount as the business grows, because a policy sized to a business ten years ago is now a fraction of the obligation.
4. What about incapacity, not just death? A stroke or a dementia diagnosis takes an owner out of the business without triggering any death provision. Agreements that address death and ignore disability leave the harder case unhandled.
5. Who runs it on the Monday? Succession of ownership is not succession of management. Name who has authority to sign, to pay staff, to deal with the bank — and make sure the bank knows before it needs to.
6. Does the family know what you have decided? An agreement your executor cannot find does not operate. Keep a copy with the estate documents and tell the person who will have to use it that it exists.

If you are a sole owner the questions change but do not disappear: the business has no co-owner to buy it, so the realistic outcomes are sale, transfer to someone in the family who can actually run it, or an orderly wind-down. Deciding which, and writing down what a successor would need to know, is the whole of the planning.

If it is not an LLC

Most of this page is about limited liability companies, because most small businesses are one. Partnerships and corporations behave differently at a death, and in opposite directions.

Partnerships

A partner's death does not dissolve the partnership. Under the uniform act most states have adopted, it dissociates the partner — and the partnership is then obliged to buy the interest out. The same section treats the appointment of a guardian or conservator, and a judicial finding that a partner can no longer perform their duties, exactly as it treats death. A partnership interest can be lost to incapacity as completely as to death, sometimes through a conservatorship the family sought themselves.

The price is statutory rather than negotiable, and the formula is the thing to read before arguing about value. It is the greater of liquidation value and going-concern value — but the going concern is valued without the continuing services of any of the partners. A business whose worth was its founder is priced as a business without its founder. There is also a deadline: where no agreement is reached within a hundred and twenty days of a written demand for payment, the partnership must pay its own estimate in cash.

That makes the written demand the single most useful thing an estate can send. Until one is made, nothing is running.

Corporations

Shares pass to the estate and then to whoever inherits them, subject to any restriction on transfer. The restriction is where succession actually happens in a closely held company — a right of first refusal to the corporation or the other shareholders, an obligation on the company to buy, or a requirement that a transfer be approved.

A restriction binds only if its existence is noted conspicuously on the front or back of the certificate, or is in the statutory information statement. Where it is not, it is unenforceable against somebody without knowledge of it — so a buy-sell agreement in a drawer does not bind an heir whose share certificate says nothing. Check the certificate, not only the agreement.

A restriction also does not reach shares issued before it was adopted, unless the holders were party to it or voted for it. In a company where shares were issued over many years, different blocks can be subject to different rules.