Right of First Refusal: Keeping LLC Ownership in the Right Hands
One of the biggest threats to the long-term stability of an LLC is when ownership changes hands unexpectedly or without member input. Whether it’s...
6 min read
Most LLC owners don’t expect to step away from their business suddenly. But whether due to retirement, illness, or death, ownership transitions can come faster than anticipated—and if your LLC doesn’t have a succession plan in place, the consequences can be severe.
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Without a clear strategy, your business may face legal uncertainty, internal disputes, stalled operations, or even forced dissolution. This guide outlines what can happen when an LLC lacks a succession plan—and why taking action now is the best way to protect your legacy.
Example – Some States Require to Dissolve Automatically
Some states require the LLC to dissolve automatically if a member dies, unless the operating agreement says otherwise. Others may transfer ownership to a spouse or heir—even if they have no knowledge or interest in the business.
You also lose the ability to control:
- Who takes over your ownership share
- Whether the business continues operating or must wind down
- How your interest is valued or bought out
This lack of control can jeopardize everything you’ve built.
1. State Laws Take Over—And They Might Not Favor Your Intentions
In the absence of a written succession plan, your state’s default LLC laws determine what happens next. These laws vary, but they rarely align perfectly with what most business owners would want.
Pro Tip – A Succession Plan Puts Control in Your Hands—Not the State’s
Leaving your LLC’s future up to state law is a gamble. A simple operating agreement amendment or buy-sell clause can ensure your wishes—not default statutes—guide what happens next.
2. Heirs or Family Members May Inherit Ownership Without a Roadmap
If your LLC has no succession plan, your ownership interest may pass to your heirs by default—usually a spouse, child, or other next of kin. While this might sound reasonable, it often creates more problems than it solves.
Most heirs aren't prepared to take over a business:
- They may have no experience or desire to run the company.
- They might disagree with existing members about business direction, voting rights, or financial decisions.
- They may expect a buyout but there’s no agreement in place to govern how that happens—or how it’s paid for.
This can leave the business in limbo, especially if the operating agreement doesn’t explain:
- Whether heirs get management rights or only financial interest
- How quickly a buyout must occur
- Who determines the value of the inherited ownership
Example – A Business Stalled for 18 Months in Probate After the Owner Passed With No Succession Plan
A small design firm lost its founder unexpectedly. With no succession plan in the operating agreement, ownership passed to his spouse—who had no interest in the business. The two remaining members wanted to buy her out, but without a valuation method or timeline, negotiations dragged on. During the 18-month delay, the firm lost major clients, employees, and revenue.
This kind of delay is avoidable—and a clear succession plan is how you prevent it.
3. The Business Could Be Forced to Dissolve
In some states, if an LLC member dies, becomes incapacitated, or exits without a succession plan in place, the business may be automatically required to dissolve. Even in states where dissolution isn't automatic, the uncertainty caused by a missing plan can push members toward shutting down operations simply because they don’t have a clear path forward.
Here’s what that can look like:
- Remaining members may be legally required to liquidate assets and distribute proceeds to the estate of the departing member.
- Vendors, clients, and employees may leave due to leadership instability, making continuation impractical.
- A once-thriving business may close unnecessarily, not because it failed—but because it was legally unprepared.
Even if the members want to continue the business, they might have to:
- Form a new LLC
- Renegotiate contracts
- Rebuild relationships from scratch
This causes major disruptions—and often leads to lost momentum, lost customers, and lost trust.
Pro Tip – Including Continuation Language in Your Operating Agreement Protects the Business
A well-drafted succession clause can state that the LLC will continue after a member exits or passes away, and it can spell out exactly how ownership will be reassigned or bought out. That one clause could be the difference between continuing or closing.
4. Potential Legal Disputes Between Members and Heirs
Without a clear succession plan, there’s a high risk of legal disputes between surviving LLC members and the heirs of a departing owner. These disputes often stem from unclear expectations, valuation disagreements, or conflicting visions for the business’s future.
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Common points of contention include:
- Who has the right to make decisions if an heir inherits ownership?
- Whether the heir receives voting rights or is entitled only to profit distributions.
- If and how the heir will be bought out, and at what price.
- How quickly payment must be made, and what happens if members can’t afford it.
These issues don’t just strain relationships—they can lead to:
- Costly litigation that drains time, money, and focus.
- Stalled operations while legal rights are sorted out.
- Long-term damage to both the business and the family.
Pro Tip – A Written Plan Helps Prevent Lawsuits and Preserves Relationships
Most legal disputes in closely held businesses don’t happen out of greed—they happen because there was no agreed-upon path forward. A clear succession plan removes ambiguity, reduces emotional friction, and ensures all parties know what to expect.
5. Valuation and Buyout Conflicts Can Derail the Business
When an LLC member exits—especially unexpectedly—valuation becomes one of the most contentious issues if no succession plan exists. Without a predefined method in your operating agreement, remaining members and heirs are left guessing:
- What is the business worth?
- How much should the exiting member or their estate receive?
- Who gets to decide?
Example – A Co-Owner Had to Sue the Estate of a Deceased Member to Determine a Buyout Value
After one of two co-owners of a small logistics firm passed away, the surviving owner wanted to buy out the estate. But without a valuation method or funding structure in the operating agreement, negotiations broke down. The estate’s representative insisted on a price double what the owner believed was fair. Eventually, a lawsuit was filed, costing tens of thousands in legal fees and delaying operations for over a year.
This lack of structure can lead to:
- Conflicting appraisals that stall negotiations.
- Cash flow stress for remaining members if the buyout amount is unexpectedly high.
- Legal disputes over fairness or interpretation.
Even well-meaning families and business partners can fall into conflict if one party believes the valuation is unfair or the buyout terms are unreasonable.
Pro Tip – A Predefined Valuation Method and Buyout Process Avoids Conflict and Keeps the Business Moving
Your operating agreement should specify how the LLC will be valued and how buyouts will be funded. This clarity prevents disputes and keeps everyone focused on the future instead of fighting over the past.
6. The Business May Lose Momentum or Collapse
Even if the LLC technically survives the departure or death of an owner, the lack of a succession plan can cause it to lose direction, credibility, and critical momentum.
Here’s what often happens:
- Clients lose confidence when they sense uncertainty in leadership.
- Key employees may leave, especially if no one steps in quickly to provide clear guidance.
- Vendors and lenders may become cautious or withdraw support, unsure of who’s in charge.
- Internal decisions get delayed or derailed, stalling growth and damaging morale.
These effects compound over time. What starts as a brief transition period can quickly turn into a leadership vacuum, missed opportunities, and even revenue collapse.
In small to midsize LLCs, the loss of a founder or managing member without a clear plan often results in:
- Abandoned marketing efforts
- Slow customer service responses
- Inconsistent management decisions
- And ultimately, loss of brand reputation
All of this is avoidable—but only if a plan is in place before it’s needed.
Conclusion
When an LLC has no succession plan, the fallout can be immediate and devastating. From forced dissolution to ownership disputes and lost momentum, the risks of leaving your business unprepared far outweigh the effort it takes to plan ahead.
Succession isn’t just about death or retirement—it’s about ensuring that your LLC continues to operate smoothly, legally, and profitably no matter what changes come. Without a plan, you surrender control to state laws, courts, or unprepared heirs—none of whom will understand your business the way you do.
Key Takeaways:
- State laws will fill in the gaps—but they might not protect your business or your vision.
- Family members and co-owners can quickly become embroiled in costly disputes.
- The lack of clear valuation or buyout terms can stall or sink your company.
- Even thriving businesses can lose momentum or collapse entirely in the absence of leadership.
If you haven’t created a succession plan for your LLC, don’t wait for a crisis. Work with a business attorney and tax advisor to put a plan in writing that protects your company, your partners, and your legacy.
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