CALIFORNIA PROBATE ESTATE WITH AN UNINCORPORATED BUSINESS, PARTNERSHIP OR LIMITED LIABILITY COMPANY
First, the personal representative must determine whether the business interest can be handled without formal administration or whether probate is necessary. For example, if the shares of a limited liability company are to be distributed by assignment to the trustee of a living trust, the authority to handle the decedent’s business interests need not come from the probate court. Also, for example, if the business interest was the community property of the decedent and surviving spouse or registered domestic partner, the summary administration procedure under California Probate Code §§ 13650-13660 is available.
In addition, if the decedent dies prior to April 1, 2022, then the business interests may be collected without formal administration under California Probate Code §§ 13100-13115 (personal property) and §§ 13150-13158 (real property) if the value of the estate does not exceed $166,250.00, or under California Probate Code §§ 13200-13210 (real property) if the gross value of all decedent’s real property in California does not exceed $55,425.00, regardless of the total value of the estate. For decedents dying on or after April 1, 2022, these amounts will be adjusted in accordance with the Consumer Price Index every 3 years and published by the Judicial Council.
If full authority has been granted to the court appointed personal representative under the Independent Administration of Estates Act (IAEA), the personal representative has the power, without court supervision, to do the following:
- Continue operation of an unincorporated business or venture (i.e. sole proprietorship) in which the decedent was engaged or which was wholly or partly owned by the decedent at the time of death. (see below explanation).
- Continue as a general partner in any partnership in which the decedent was a general partner at the time of death (see below explanation); and
Unincorporated Business or Venture (Sole Proprietorship)
A court appointed personal representative may operate a sole proprietorship business with or without court authority for only up to 6 months after letters (i.e. testamentary letters or letters of administration) have been issued; thereafter, the personal representative must petition the court for such authority. The personal representative has the power to continue operation of any of the following:
- An unincorporated business or venture in which the decedent was engaged at the time of the decedent’s death.
- An unincorporated business or venture which was wholly or partly owned by the decedent at the time of the decedent’s death.
Seeking court authorization to operate the decedent’s sole proprietorship business, even if not required, is usually advisable. Because personal representatives take decedents’ businesses as they find them, obtaining court authority might provide protection against claims by beneficiaries and third parties. Also, seeking court authority beforehand also prevents any delays in operation of the business that could occur if the 6-month period were reached and permission had yet to be granted; additionally, providing notice to beneficiaries that the business is being operated gives added protection to the personal representative.
Partnerships
The personal representative has the power to continue as a general partner in any partnership in which the decedent was a general partner at the time of death. A general partner actively engages in the management and control of the business and has unlimited personal liability for the obligations of the partnership.
It is important to distinguish a limited partnership from a general partnership. A limited partnership, like a general partnership, consists of two or more persons associated to carry on a business for profit. However, unlike a general partnership, a limited partnership must have one or more “limited partners” and one or more “general partners.” A limited partner is a passive investor who typically has no power to bind the partnership contractually, does not participate in the control of the business, and is not personally liable for the obligations of the partnership.
The partnership agreement generally determines how a decedent’s partnership interest is to be administered after the death of a partner and addresses the effect a partner’s death will have on the partnership. The probate court will enforce partnership agreement provisions that control the disposition of partnership interests after death.
If there is no agreement or if it is silent on this issue, two primary sources of law on handling a decedent’s partnership interest are set out in different parts of California’s Corporations Code and Probate Code. To understand which law applies, the personal representative must first determine the type of partnership involved, i.e., general partnership, limited partnership, or limited liability partnership. Once the type of partnership is established, the applicable law of that partnership will apply (See California Corp Code §§ 15901.10(a) (limited partnership) and 16103 (general partnership).
Limited Liability Companies (LLCs)
A limited liability company (LLC) is a form of business organization, distinct from its members, that provides flexibility in organization and operation by blending elements of traditional partnership and corporate structures. It may be treated as a partnership for income tax purposes and as a corporation for liability purposes, and provide limited liability to its owners (members).
An LLC may be a member-managed entity or a manager-managed entity. A member-managed LLC operates in such a manner that all members participate in running the business. A manager-managed LLC allows only certain designated members the responsibility of running the business.
Most LLCs adopt an extensive written operating agreement that is essentially a partnership agreement and a buy-sell agreement, together with bylaws. Many aspects of the LLC that are not covered by the operating agreement are governed by the default provisions of California law.
The California Revised Uniform Limited Liability Company Act (RULLCA), effective January 1, 2016, permits a deceased member’s personal representative to exercise the member’s rights for the purpose of settling the member’s estate or administering the member’s property, including exercising any power to give a transferee the right to become a member.
In particular, under the RULLCA, a member will be “dissociated” on that member’s death. Prior to its revision in 2016, RULLCA provided that a deceased member’s court appointed personal representative was allowed access to the LLC’s records or company information for purposes of settling the deceased member’s estate, but in all other respects the personal representative would have only the rights of a transferee. This suggested that the personal representative would not have any of the rights of a member holding a membership interest other than to receive distributions associated with the assigned portion of the membership interest.
However, effective January 1, 2016, RULLCA was revised to provide that a deceased member’s personal representative “may exercise all of the member’s rights for the purpose of settling the member’s estate or administering the member’s property,” including exercising “any power the member had under the articles of organization or an operating agreement to give a transferee the right to become a member.”
Closely Held Corporation
When the estate includes stock in a closely held corporation, the representative’s role depends in part on the number of shareholders and the size of the decedent’s interest, i.e., if the decedent was a majority or sole shareholder, the personal representative’s responsibilities will be different than if the decedent owned a minority interest. The representative must exercise the degree of prudence and diligence that a person of ordinary judgment would use in connection with his or her own affairs. Thus, the representative must take action as though he or she were a shareholder.
A representative responsible for a large block of stock, or who holds stock in a company in which the decedent actively participated, should consider obtaining court authority to continue participation in the business. The fact that the decedent was employed by the corporation or on its board of directors does not mean, however, that the representative must take the decedent’s place. The role of the representative depends on the facts of each case.
Conclusion
Please contact me if you are involved with the death of a person with a Will or without a Will and especially of the deceased person had business interests. I handle probate matters in all California counties, including Southern California Counties, such as Imperial County, Los Angeles County, Orange County, San Bernardino County, and San Diego County. I also represent parties residing outside of California that have probate matters affecting real and/or personal property in California.
Disclaimer: This article is intended to provide general information. The content of this publication is for informational purposes only. Neither this publication nor its author is rendering legal or other professional advice or opinions on specific facts or matters. No attorney-client relationship is created by this advisory, nor by any response to the information herein, unless and until a conflicts review has been conducted by William K. Sweeney, and a written agreement containing all terms of representation has been signed.
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