Recently I met with two very troubled men who are at the beginning stages of a nightmare caused by the death of a member of an Arizona limited liability company and the LLC members’ failure to document their LLC and enter into a Buy Sell Agreement. As I listened to their tale of woe, I was reminded of the time I heard Mike Gallagher, the founder of Gallagher & Kennedy, P.A. my former law firm, say to a young G & K lawyer in jest, “Jim, you aren’t completely worthless. You can always be used as a bad example.” What we have here is the perfect bad example caused by the failure to plan.
The two men (who I will call Bob and Jim) were involved with a single member LLC I will call World Wide Widgets, LLC (WWW) owned by Jack, a single man with no children. Over a period of years Bob loaned several hundred thousand dollars to the LLC without any documentation. Bob and Jim agreed orally that as part of the loan the WWW would pay Bob interest plus a share of the substantial profits of WWW. Jim was the primary person who ran the company on a day to day basis.
The company was very successful and making big bucks because it had a very valuable contract with a nationally known company that had a fabulous online business. Everybody was very happy with the company and the money and profits they received from the highly successful WWW. Jack told Bob and Jim that he was going to give them part ownership of WWW.
Unfortunately Jack died without warning and all hell broke loose because the parties made the following fundamental mistakes:
- No Loan Documents. Bob did not document his loan to WWW with a promissory note. Nor did he secure payment of the note with a lien on WWW’s assets. Bob cannot enforce his loan without going to court or making a deal with Jack’s heir, both of which are expensive courses of action best to be avoided.
- No Option to Acquire Membership Interests. Bob and Jim did not get Jack to sign a contract that provided they had a right to become members of WWW. Nor did they push Jack to actually transfer partial ownership of WWW to them. If Bob and Jim had entered into an option to acquire membership interests in WWW they would have been able to become members without the need to sue (a difficult case to prove) or making a deal with Jack’s heir. If Bob and Jim had been members of WWW they would have been wise to have entered into a Buy Sell Agreement with Jack that would have given WWW and themselves an option to buy Jack’s membership interest in WWW from Jack’s heir after death. The purpose of a Buy Sell Agreement is to allow ownership of an LLC to be retained in the hands of the LLC members in the event a member dies. To learn more about Buy Sell Agreements see my website on this important topic.
- No Employment Agreement. Jim did not have an employment agreement signed by WWW. Without an employment agreement Jim’s job and compensation was at the mercy of Jack’s heir.
- No Estate Plan. Jack did not have a Will or a Trust that provided who inherited WWW after his death. Jack’s only living relative was an estranged sister with whom he had not had any contact for years. Bob and Jim believe that Jack would have wanted them to inherit WWW, not his estranged sister. Because Jack died without an estate plan, the State of Arizona’s estate plan determined who inherited Jack’s assets. Because Jack was single, had no children and his parents were deceased, his entire estate was inherited by the estranged sister who didn’t give a hoot about Bob and Jim and their failure to get signed documents. To learn more about Arizona Wills, Trusts, estate planning and how to give your family asset protection see my website called Arizona Wills & Trusts.
The end result was not pretty, but it was a very expensive lesson from which I hope others can learn.
Lessons to Be Learned
1. People die.
2. People die. I repeated this lesson because the reality of life is that few people believe this is a true statement. This is the conclusion I have reached after 28 years as a business lawyer who has formed 8,560+ companies, the vast majority of which none of the members took action to make life easier on their loved ones and co-members while alive.
3. Document with signed agreements all transactions involving your LLC. These transactions include promissory notes (with a resolution of members authorizing the loan), employment agreements, independent contractor agreements, options to purchase membership interests in the LLC and a Buy Sell Agreement signed by all of the members.
4. If you have an ownership interest in an LLC or a corporation, sign a Will or a Trust that provides who will inherit your interest in the companies when you die.
If you need to document a transaction or provide for the orderly transfer of your companies and other assets on your death, call me, Richard Keyt (480-664-7478) or my son Arizona LLC and estate planning attorney Richard C. Keyt (480-664-7472). Do it now. Don’t procrastinate until it’s too late and you become a bad example like Bob, Jim and Jack. To learn more go to Arizona Wills & Trusts.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]