Business Succession Planning for LLCs with Unrelated Owners: What Happens When a Member Dies?

In working with business owners over the last few years, one issue has consistently flown under the radar until it’s too late: what happens when a business partner dies? It’s one of the most overlooked—but most important—aspects of running a company. Most business owners are focused on growing the business, making payroll, and serving customers. But without a plan in place for the death of an owner, even the most successful business can quickly find itself in conflict, disarray, or facing a forced sale.

This is especially true for companies with two or more unrelated owners. When business partners are not family, their estates may have no real connection to the business or to the surviving owner. Without clear agreements in place, the death of a member can lead to confusion, legal disputes, and a breakdown in trust—sometimes even the collapse of the business itself.

So how do you plan for it?

Why Planning for Death in an LLC Matters

Let’s consider a common scenario: two individuals—friends, colleagues, or simply like-minded professionals—form an LLC and split the ownership 50/50. They run the business successfully for years. But then one of them unexpectedly passes away.

If there’s no succession plan in place, the deceased member’s interest usually passes to their estate or heirs. Now, the surviving member may find themselves co-owning the company with the deceased member’s spouse, adult children, or other family members—people who may have no interest in the business, no knowledge of its operations, and no working relationship with the surviving partner.

This can create real challenges. Decision-making can become difficult. The heirs may want to sell their interest, demand distributions, or question the company’s management. Meanwhile, the surviving member just wants to keep the business running without being tied to new, unintended partners. Without a roadmap, this kind of transition often leads to conflict—or a forced sale of the business itself.

The Right Tool: A Buy-Sell Agreement

Aside from the obvious need for an Operating Agreement between (or among) members of a company - the cornerstone of succession planning for unrelated business partners is a Buy-Sell Agreement. This is a legally binding contract that says what will happen to a member’s ownership interest if they die—or, in many cases, if they become disabled, divorced, or want to exit the business for any reason.

When it comes to planning for death, a well-drafted Buy-Sell Agreement answers critical questions: Will the surviving member have the option—or obligation—to buy out the deceased member’s share? Will the estate or heirs be required to sell? How will the interest be valued? How will the buyout be funded?

The most common and effective strategy is to fund the buyout with life insurance. Let's set aside the Supreme Court's 2024 holding in Connelly v. United States for simplicity's sake. Either the company or the members themselves purchase policies on each other’s lives, and in the event of death, the proceeds are used to buy out the deceased member’s interest. This allows the surviving member to retain control of the business, while the deceased member’s heirs receive a fair, pre-agreed payout—without confusion or delay.

But this only works if the documents are clear, consistent, and coordinated. The Buy-Sell Agreement should spell out the valuation method—whether a fixed number, a formula based on earnings, or an appraisal method—as well as the payment terms. Will the purchase price be paid in a lump sum? Over time? With interest?

These are all questions that need to be answered before anyone dies—not in the middle of grief, pressure, and uncertainty.

Coordination with the Operating Agreement

Too often, businesses will have a Buy-Sell Agreement drafted, but fail to update or align their Operating Agreement. In an LLC, the Operating Agreement governs the relationship between the members, and it must be consistent with any outside agreement.

It should also address what happens to a member’s interest upon death. Can it transfer freely to a spouse or child? Does the interest remain with the estate, or must it be sold? Will the transferee have voting and management rights, or only a passive financial interest? These are important distinctions, and without clarity, disputes are almost guaranteed.

If the company owns the life insurance policies, that too should be documented within the Operating Agreement or in a companion agreement—especially who pays the premiums, who is the beneficiary, and what happens to any excess proceeds.

The Bottom Line

Succession planning is not about being pessimistic—it’s about protecting the business and everyone connected to it. When unrelated business owners take the time to plan for the “what ifs,” they bring stability, clarity, and peace of mind to the enterprise.

A Buy-Sell Agreement, properly funded and coordinated with your Operating Agreement, is one of the smartest investments you can make in your business’s future. It ensures that when the unexpected happens, the business can move forward, the surviving owner has control, and the deceased member’s family receives the value they deserve.

Book a consultation to walk through your options and protect what you’re building—because the best time to plan is before you need to.

Want to talk through your options or review your existing documents? I’m happy to help. At Auxo Law, we make succession planning practical, personal, and easy to understand—because every business deserves a plan for what’s next.