LLC Operating Agreements and Succession Planning: What to Include
An LLC’s operating agreement serves as the foundation for governing the business, defining ownership rights, and outlining key decision-making...
7 min read
When you're building a business, you're focused on growth, clients, and day-to-day operations. But what happens when it's time to step away—whether due to retirement, illness, or unexpected events? Without a clear succession plan backed by the right legal documents, your LLC could face confusion, conflict, or even collapse.
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Succession planning isn’t just for massive corporations. Even small family-run LLCs need a strategy to ensure the business continues running smoothly—without sparking disputes or forcing a fire sale. This guide walks you through the essential documents you’ll need to make sure your business can survive and thrive after you’re gone.
Why Succession Planning Matters for LLCs
Too many business owners assume succession is a “someday” problem. But unexpected life events—death, disability, divorce, or even a surprise retirement—can throw your company into chaos if you’re unprepared.
Here’s why planning matters:
- It protects your legacy. You’ve worked hard to build something. A good plan ensures it doesn’t disappear—or land in the wrong hands.
- It minimizes family disputes. When roles, ownership, and transitions are clear, emotions don’t have to drive the decision-making.
- It keeps the business running. With a documented plan, operations can continue smoothly while legal and ownership transitions take place.
Succession planning isn’t just for aging founders. Multi-member LLCs, startups with multiple investors, and family-run businesses all need a written roadmap—because anything can happen, and usually faster than you expect.
The Core Legal Documents You’ll Need
A proper LLC succession plan isn’t just one document—it’s a set of tools that work together to make sure ownership and control pass smoothly to the right people. Here’s a breakdown of the essential documents, and how each plays a role in succession:
Operating Agreement
This is your LLC’s playbook. A good operating agreement should include:
- Ownership structure
- Voting rights and decision-making authority
- What happens if a member leaves, dies, or becomes incapacitated
If your agreement doesn’t already address succession, it’s time to revise it.
Buy-Sell Agreement
This is a contract among members that outlines:
- What triggers a buyout (e.g., death, retirement, divorce)
- How the business is valued
- How and when the departing member—or their heirs—get paid
Without this, surviving members may be forced to work with someone who inherited ownership but has no interest or experience in the business.
Succession Plan Document
This standalone plan spells out:
- Who takes over operational roles
- Short-term and long-term responsibilities during a transition
- Key timelines and next steps if something happens to the founder or a key member
It complements your legal documents by laying out the “real world” logistics of keeping the business alive during a transition.
Example – Succession Without a Plan – What Went Wrong
A two-member real estate investment LLC had no succession plan and no buy-sell agreement. When one partner passed away unexpectedly, his shares passed to his spouse via his will. She had no real estate experience—and wanted to liquidate immediately.
The surviving member wanted to keep the business going but had no agreement or funding in place to buy her out. Legal battles followed, tenants were left in limbo, and the LLC was eventually dissolved. A few simple documents could’ve preserved both the partnership and the assets.
Last Will and Testament
If you’re a single-member LLC or hold a majority interest, your will must clearly state who inherits your LLC interest. But a will alone often isn’t enough to transfer ownership cleanly—it needs to work alongside your operating agreement and buy-sell terms.
Living Trust
Transferring your LLC interest to a trust allows it to pass outside of probate. This can preserve privacy, speed up the transition, and reduce the risk of challenges in court.
Power of Attorney
If you become incapacitated, a financial power of attorney can allow someone you trust to manage your business affairs—but only if it’s executed properly and includes authority to act on LLC matters.
Pro Tip – Don’t Rely on Just One Document
Succession planning isn’t a one-and-done deal. Each document serves a different function:
- The operating agreement sets internal rules
- The buy-sell agreement handles transitions
- The trust or will deals with inheritance
- A succession plan maps the logistics
They need to be aligned—otherwise, one can unintentionally override or conflict with another.
How to Structure a Buy-Sell Agreement for Succession
The buy-sell agreement is one of the most powerful (and often overlooked) succession tools for an LLC. Think of it as a “business prenup.” It controls what happens when an owner exits the company—whether by choice or due to life events like death, divorce, or disability.
Here’s what to include:
Triggering Events
Your agreement should spell out what situations activate a buyout, such as:
- Death of a member
- Permanent disability
- Retirement
- Divorce (especially if the ownership stake could become marital property)
- Voluntary exit
Each event may have a different process or timeline, so be specific.
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Valuation Method
Decide how the LLC will be valued. You can:
- Set a fixed price and update it annually
- Use a formula based on earnings or revenue
- Require a third-party appraisal
Valuation disagreements are one of the top sources of conflict in buyouts, so this clause is essential.
Funding Mechanism
Once the price is set, how will it be paid? Options include:
- Life insurance on key members (used to fund a buyout if someone dies)
- Installment payments over time
- Business reserves or financing
Without a funding strategy, even a great buy-sell agreement can fall apart because the remaining members can’t afford to follow through.
Example – A Smooth Exit Funded by Life Insurance
Two cousins co-owned a construction company through their LLC. They planned ahead and purchased life insurance policies on each other, naming the LLC as the beneficiary. When one unexpectedly passed away, the LLC received the insurance payout and used it to buy out the deceased cousin’s heirs per their buy-sell agreement.
The surviving cousin kept full control, the heirs received a fair payment, and the business didn’t suffer financially.
Pro Tip – Include a "Right of First Refusal"
A right of first refusal gives current LLC members the first chance to buy any ownership interest before it’s sold to an outside party or inherited by someone not involved in the business.
Why it matters:
- Keeps ownership in the family or original team
- Prevents unexpected outsiders from gaining control
- Buys time to fund a strategic buyout
Sample Provision:
“Before any Member may transfer their interest to a third party, they must first offer it to the other Members on the same terms.”
This one clause can make a huge difference when succession gets messy.
When and How to Use a Trust for LLC Succession
A trust can be one of the cleanest and most private ways to transfer ownership in an LLC—especially for single-member LLCs or family-run businesses. Unlike a will, which goes through probate and becomes a matter of public record, a trust passes assets directly and privately to beneficiaries.
Why Use a Trust?
- Avoids probate. The LLC interest transfers immediately upon your death, which speeds up succession and reduces court involvement.
- Preserves privacy. No public records or court filings needed, unlike with wills.
- Allows control from beyond. You can set conditions for how and when the LLC interest transfers (e.g., your child doesn’t get ownership until they turn 30).
- Provides continuity. Helps avoid disruptions in leadership or ownership during probate delays.
How to Transfer Your LLC Interest to a Trust
This step is often misunderstood—and done incorrectly. It’s not enough to just mention the LLC in your trust. You need to formally assign ownership.
Here’s what the process looks like:
- Create the trust (usually a revocable living trust).
- Draft an assignment of interest document, transferring your LLC membership interest into the trust.
- Update your LLC operating agreement, if needed, to allow the trust to hold ownership.
- Notify any co-owners and document the change in your LLC records.
Pro Tip – Assign Your LLC Interest to the Trust—Don’t Just Mention It
Many business owners create a trust and assume their LLC interest is covered. But unless the interest is formally transferred—usually through a written assignment—it won’t be considered part of the trust.
Think of it this way: if your LLC interest isn’t listed as an asset of the trust, it still has to go through probate, defeating the purpose.
To do it right:
- Work with an attorney to draft the assignment
- Update your LLC’s records and ownership ledger
- Add the trust as the official owner in any state filings, if required
This one move can save your heirs months of frustration and keep your business running smoothly during the transition.
Reviewing and Updating Your Documents
Creating a succession plan isn’t a one-time task—it’s an evolving process. Your LLC will grow. Your family situation may change. Tax laws and business needs can shift. If your legal documents don’t keep up, they may not work the way you intended when it matters most.
Here’s when you should revisit and update your succession-related documents:
- Major life events. Marriage, divorce, new children, or the death of a member.
- Business changes. New members joining, changes in ownership percentages, or a shift in business focus.
- Tax or legal updates. A change in state law or tax rules could affect how your plan works.
- Time alone. Even without big changes, it’s wise to review your plan every 2–3 years to keep it aligned with your goals.
Make this a scheduled habit, not an afterthought. Calendar a reminder to review everything—operating agreement, trust, will, buy-sell agreement, and powers of attorney.
Pro Tip – Create a Digital Succession Folder
One of the most helpful things you can do—especially for your family or co-owners—is to create a secure, digital folder that contains all your key succession documents. Include:
- Signed copies of your operating agreement and buy-sell agreement
- Trust documents and any assignments
- Will and power of attorney
- Contact info for your attorney, CPA, and any key advisors
- A simple letter of instructions with who to contact and what to do first
Keep it encrypted or password-protected, and share access with at least one trusted person who knows where to find it. This small step can save weeks of confusion and help carry out your wishes exactly as planned.
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