When starting a business, it`s important to have a clear understanding of the legal structure and requirements for your company. For many small businesses, forming a limited liability company (LLC) is a popular choice. One crucial aspect of an LLC is the operating agreement, which establishes the rules and regulations for how the company will operate.

One element of an operating agreement that often goes overlooked is the survivorship clause. This clause outlines what happens to the LLC in the event of a member`s death or departure from the company. Understanding how survivorship works is essential for protecting your business and ensuring its continuity.

What Is a Survivorship Clause?

A survivorship clause, also known as a «buyout» or «continuity» clause, outlines what happens to an LLC in the event of a member`s death or departure from the company. Without a survivorship clause, the LLC could be dissolved or restructured in a way that is not in the best interest of all members.

The survivorship clause specifies what happens to a member`s share of the business when they leave or die. Typically, the remaining members of the LLC will have the option to purchase the departing member`s share at a predetermined price or based on a formula outlined in the operating agreement. This ensures that the remaining members retain control of the business and that the departing member (or their estate) receives fair compensation for their share.

Why Is A Survivorship Clause Important?

A survivorship clause is important for several reasons. First and foremost, it protects the interests of the remaining members of the LLC by ensuring that they retain control of the business. This prevents the LLC from dissolving or being restructured in a way that could be detrimental to the surviving members.

Additionally, a survivorship clause can provide peace of mind to the members of the LLC and their families. Knowing that there is a clear plan in place for the future of the business can alleviate some of the stress and uncertainty that can arise in the event of a member`s death or departure.

What Should Be Included in a Survivorship Clause?

When creating a survivorship clause, there are several key elements to consider. These include:

– The purchase price or formula for determining the value of the departing member`s share

– The timeline for completing the purchase

– The method of payment (i.e. lump sum or installment payments)

– The obligations of the departing member to assist with the transition

– The rights and responsibilities of the remaining members during the transition

It`s important to consult with a legal professional when drafting a survivorship clause to ensure that it meets all legal requirements and addresses the specific needs of your LLC.

In conclusion, a survivorship clause is a crucial element of an LLC`s operating agreement. It protects the interests of the remaining members of the LLC, provides peace of mind, and ensures the continuity of the business in the event of a member`s death or departure. By including a survivorship clause in your operating agreement, you can help safeguard the future of your business.