Avoiding Common Pitfalls of the Single Member Business Entity – Alex Blackwell
Alexander D. Blackwell
Denton Law Firm
555 Jefferson Street
Paducah, Kentucky 42001
Avoiding Common Pitfalls of the Single Member Business Entity
Some individuals find benefits to forming a single member limited liability company (hereinafter referred to as “LLC”). However, there are some potential pitfalls which must be considered in order to prevent the business from unnecessarily crumbling. One important question that the single member must ask themselves is “Who will run the business if I am unable to?” Most individuals have someone who will quickly pop into their mind as being a capable substitute to handle the issues that their business faces. However, the more important question to ask is “Who has the legal authority to run the business if I am unable to?”
It is easy for many to brush over this issue. Even the most simple of tasks may not be capable of completion if the sole member becomes incapacitated or passes away. If the sole member is incapacitated or deceased, who pays the company payroll? Who can pay for the next shipment of supplies for the business? Who has authority to write checks for rent and utilities for the office? If the sole member passes away, who takes over the business? There are countless issues which could arise that can quickly damage a business which the sole member spent time and money on in order to get off the ground. Luckily, there are options.
The Kentucky Revised Statutes provide guidance with respect to how to replace the sole member of a limited liability company once they are no longer alive. KRS 275.285 provides that a LLC shall be dissolved and commence the winding up process once there are no remaining members in the LLC, but the statute goes on to provide two exceptions to this rule. First, the operating agreement may provide the manner for which a new member replaces the deceased single member of the LLC. Secondly, if the operating agreement does not provide the method of replacing the member, the successor-in-interest of that member to the LLC may agree to replace the previously deceased member. This must be done within ninety (90) days.
The operating agreement for the LLC can contain the most valuable information for these situations. A succession plan can be laid out in an operating agreement. This plan does not have to be limited to only being communicated upon the member’s death. For example, the plan could be activated upon the incapacity of the sole member. Conversely, the operating agreement could provide that the successor-in-interest of the sole member does not have the right to continue the LLC, effectively terminating the business upon the death of the sole member. A sole member has broad discretion to determine their succession plan. While this may seem like a simple and obvious step for business planning, it is often overlooked.
An additional avenue for granting a non-member power to conduct business for your LLC is through the use of a power of attorney. This would provide the ability for a non-member to exercise authority prior to the death of the single member. However, the powers which are granted within the power of attorney should be just broad enough to ensure the business will be continued, but narrow enough that the power of attorney does not have the ability to perform unnecessary actions.
The provisions within the power of attorney are important. While most powers of attorney contain a general “catch-all” provision at the end, only a power of attorney which explicitly provides that the attorney in fact can conduct operations for the LLC owned by the principal will be acceptable. While the power of attorney can be a very useful tool for the sole member LLC, it is vital that the document is properly drafted and the principal has taken time to consider all of the variables that will come into play when determining not only who to grant the power to, but also what powers to grant them.
This article provides only a brief overview of the options for properly setting up the succession plan for your LLC. If you have any further questions regarding this issue, or any business law issues ranging from the organization of your business to business litigation, and would like to further discuss these issues, please contact Alex Blackwell at 270-450-8253.
DISCLAIMER: The information provided herein is provided for informational purposes only and does not constitute legal advice. Moreover, this information provided herein is not intended to create an attorney-client relationship, and receipt of the information provided herein does not create an attorney-client relationship.