Inheritance of shares in LLC
Shares in an LLC are inherited in the standard manner, like other property, including by will, inheritance contract. At the same time, partners often discuss what rights the heirs will have, whether they will be able to enter the business on a full-fledged basis and whether they have enough competencies and life experience to participate in decision-making.
We propose to figure out whether it is possible to restrict the entry of heirs into the business and how to provide guarantees for both the heirs and the remaining partners.
We wrote about the peculiarities of inheritance in the framework of some forms of doing business HERE. Let us dwell in more detail on the LLC form as the most popular, on the one hand, and the most flexible, on the other.
In the charter of an LLC, it is possible to fix three inheritance scenarios:
1. Unconditional transfer to the heirs of shares in LLC owned by the testator
In this case, the heirs, having received a certificate of the right to inheritance, become equal participants in the LLC, after which they can independently decide whether to stay in the company or offer their share for sale to other participants or third parties.
Let’s reflect the pros and cons of this option:
For other members of the LLC
Guaranteed receipt of a share and independent initiative regarding the further fate of a share in an LLC.
Important! Participants cannot choose to take a share or “money” in the amount of the actual value of the share (clause 5 of article 23 of the Federal Law “On LLC”).
They must first become part of the LLC, and then agree to buy out their shares, sell them to third parties, or stay and receive dividends.
The heirs are part of the participants. There is no need for one-time costs, as in the case of payment of compensation for refusal to become a member.
Unpredictability in the “mood” of the heirs. There may be several heirs, the share is split between several persons. There may be conflicts between the heirs (children from different marriages, etc.), and with other participants.
Demands to buy out a stake at an overpriced are possible.
Negative aspects for the remaining members of the Society can be neutralized by working out the charter BEFORE the sudden death of one of the members:
A) adjusting the degree of influence of the heirs by cutting the competence of the general meeting of participants in favor of an elected Board of Directors or using a holding structure, which involves the change of participants only in the parent structure, and not in operating companies;
B) agreeing on the procedure for the alienation of shares, for example:
consolidation or, conversely, exclusion from the charter of the right to withdraw from the LLC (Article 26 of the Federal Law “On LLC”). Such a right implies the possibility of a participant at any time to unilaterally withdraw from the list of participants, having received the actual value of the share. Now the law allows the right to exit to be established for some persons (for example, only for heirs within a certain period of time, or, conversely, after a lapse of time);
elaboration of issues on the alienation of shares. For example, in order to exclude the possibility of overstated claims of the heirs under the threat of alienation of the share to undesirable third parties (for example, competitors), the charter can fix the amount or the formula for determining the amount at which the other participants can use the preemptive right to redeem the share;
it is necessary to consider whether it is worth granting the preemptive right to purchase not only to the participants, but also to the Company. If necessary, this makes it possible to redeem a share at the expense of the accumulated funds of the LLC itself;
the introduction of restrictions on the alienation of a share in a way other than purchase and sale, including donation: it is possible both a ban and the need to obtain the consent of the others;
setting the deadline for calculating the share;
other aspects reflecting the wishes of partners.
2. Inheritance with the consent of the rest of the participants
Participants, at their discretion, can agree to the inclusion of heirs in the list of participants or refuse. You can refuse not all, but part of the heirs. In case of refusal, the heirs are paid at the expense of the Company compensation in the amount of the actual value of the share (clause 5 of article 23 of the Federal Law “On LLC”) (recall, this is the proportion of the retained earnings of the LLC on the date of death).
Pros and cons:
For other members of the LLC
In case of refusal to join the list of participants, they immediately receive “real money”, in contrast to the status of a participant with a small share, which does not significantly influence the decisions made (especially in a situation where the share is split between several heirs).
Uncertainty as to whether they will be included in the list of participants.
In case of refusal, they receive monetary compensation, which does not take into account the possible future growth in the company’s value. It is also possible unfair understatement of the value of the company’s assets to determine the amount of payment.
The ability to make a decision depending on the personal qualities of the heir.
If there are several participants, then consent must be issued from each such participant.