BUSINESS LAW 101 / Corporate probate issues

By Albert L. Kelley

For the last few weeks this column has been focusing on general probate questions. But this is a Business Law column so I want to focus on corporate probate issues.

So let’s start with the death of a shareholder or member. Often corporations will have a Shareholder’s Agreement that will discuss how shares may be transferred. This generally will include the process to be followed in the event a shareholder passes away. It is not uncommon for a Shareholder’s Agreement to limit the transfer of a decedent’s shares to existing shareholders of the corporation. Operating Agreements generally do the same for LLCs. This means that the heirs of the decedent cannot inherit those shares. The corporation or LLC generally must pay the heirs for those shares or membership units, but the amount can be set by the Shareholder or Operating Agreement. In other words, the Agreement can specify the amount the heirs get paid, even though that amount may be far below the market value.

Assuming the corporation does not have a Shareholder’s Agreement or the Shareholder or Operating Agreement are silent on the issue, shares or membership interest are personal assets that are transferred through the probate system. This can create severe problems for the business. The heirs may not be closely related to the decedent, or not related at all. This means that the surviving members or shareholders may find that they are business partners with an absolute stranger. If the LLC is member managed, or if the decedent was a majority shareholder, this can change the management structure of the business.

Next is the death of a corporate director. This may be addressed in the Bylaws. If not, the Florida Statutes allows the vacancy to be filled by either the remaining members of the Board of Directors or by the Shareholders. Similarly, if an Officer passes away, the Directors may replace the position.

For Limited Liability Companies, the Operating Agreement can address this issue. However, if not, the statute states that if a Manager passes away they must be replaced by a vote of more than 50% of the Members. This can create a situation if the Manager also was the owner of more than 50% of the membership interest. In that situation the LLC may need to wait until then probate is filed to replace the Manager.

One problem that can arise when there corporation or LLC have no Shareholder or Operating Agreement turns up when there is a single Shareholder/Director or Member/Manager. In those situations, there will be nobody to run the business until a probate is opened. Once probate begins, the personal representative will be granted the authority to operate the business through the probate period. The heirs will be precluded from having any say in the business until the corporate shares are transferred through the probate process.

The best practice is to make sure the corporation or LLC has a well written Shareholder or Operating Agreement that covers these situations.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of four law books: (“Basics of Business Law” “Basics of Florida’s Small Claims Court”, “Basics of Florida’s Landlord/Tenant Law” and “Basics of Starting a Florida Business” (Absolutely Amazing e-Books)). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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