Why Your Operating Agreement and Estate Plan Must Work Together

Avoiding Probate for Your Business: Why Your Operating Agreement and Estate Plan Must Work Together

Before we dive in...

This blog is intended as a general guide and should not be taken as legal advice. If you're a business owner, your situation is unique—and the best way to protect your company and your family is to speak with an attorney who understands your goals and the laws of your state. That said, let’s walk through what you can do right now to start thinking smart about your business and your legacy.

Business Owners: Probate Isn’t Just a Personal Matter

Most people associate probate with wills and personal property—what happens to your house, your bank account, or your belongings when you pass away. But if you're a small business owner, your ownership interest in your company is also an asset—and without proper planning, that asset can get stuck in probate too.

That means your business could end up in limbo, leaving your family and your co-owners scrambling to figure out who’s in charge, what happens next, and whether operations can even continue.

The Missing Link: Your Operating Agreement

Your Operating Agreement (or bylaws, if you're a corporation) should include clear instructions about what happens to an owner’s interest in the event of death. Without this language, your interest may pass according to your will—or worse, according to state law if you don’t have one—and force your business into a probate process that’s time-consuming, expensive, and disruptive.

Some of the key provisions to include:

• Whether ownership interests can transfer to a trust
• Buy-sell provisions that give other members the option (or obligation) to purchase your share
• Valuation methods for the business interest
• What happens if no plan is in place

If these aren’t covered, your co-owners could end up doing business with your heirs—or worse, dealing with a court-appointed personal representative.

Using a Revocable Living Trust to Avoid Probate

One of the smartest moves a business owner can make is to transfer their ownership interest to a revocable living trust. This allows the ownership to pass outside of probate when you die—directly to the beneficiaries you’ve named or under the management of a successor trustee who can step in and take action quickly.

But—and this is a big but—your trust plan and your business documents need to work together.

If your Operating Agreement doesn’t allow for trust ownership or doesn’t recognize the trust as a valid member or shareholder, you might run into issues. In some cases, even if you list the business interest in your trust, it won’t be legally recognized unless your business documents are updated to allow for it.

The Takeaway

If you're a small business owner and you haven't reviewed your Operating Agreement or coordinated it with your estate plan, now is the time. The goal is simple: protect your business, protect your family, and make sure no one is left guessing when you're gone.

When done right, your estate plan and your business documents should speak the same language—and together, they should make it crystal clear what happens next.

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This article is a service of Dolev Law, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Life & Legacy Planning Session,Ⓡ during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.