The Lights are On but Nobody's Home: LLCs with No Members

Louis Broughton Whitfield, III, better known as L.B., owned half of the voting stock in Whitfield Foods, Inc., a food processing and packing business [1] in Montgomery, Alabama, that was started by his grandfather, Louis Broughton Whitfield, Sr., in 1906. [2] L.B.’s brother, Frank, owned the other half, or at least he did until 1996, when he died, leaving his stock in trust for the benefit of his son, Frank, Jr.

L.B. had one son -- Louis Broughton Whitfield, IV, called Louie -- and three daughters --Virginia Whitfield, Almeida Strawder, and Valerie Puckett. After Frank died, L.B. became concerned that, the voting power of his stock would be lessened after his own death if the stock were divided equally among his four children. To avoid that, he employed a very useful technique for business succession planning: he created a single-member limited liability company, the L.B. Whitfield, III, Family L.L.C., and transferred to it his entire 1,283.5 shares of voting stock. The Family LLC was manager-managed, with L.B. and Louie named as the two managers.

On the same day L.B. formed the Family LLC, he executed his will, which divided ownership of the LLC equally among his four children. Thus, after L.B.’s death, his half of the Whitfield Foods stock would continue to be voted as a single block. At least that was the plan.

And, for a time, that’s what happened. After L.B. died in 2000, Louie, who was appointed executor of his estate in accordance with L.B.’s will, went about the task of converting the Family LLC from a single-member LLC to a multi-member LLC. He obtained a new EIN for the company, set up a bank account for the purpose of receiving and distributing dividends from Whitfield Foods, and worked with an accountant to set up capital accounts for himself and his three sisters. After the estate was closed, each of the siblings began to receive equal cash distributions, paid out of the income from the Whitfield Foods stock. The Family LLC filed partnership tax returns, and Louie, Virginia, Almeida, and Valerie each received a Schedule K-1 showing a 25% allocation of the Family LLC’s income. Louie continued to serve as manager in accordance with the Family LLC’s operating agreement.

Eventually, there was a falling out, and Louie’s sisters sought to have the LLC return to them 22 shares of voting stock that they have previously transferred to L.B. and that were included in the 1283.5 shares that L.B. had placed in the Family LLC. Louie, as manager of the LLC, refused, and the Family LLC sought a declaratory judgment that the sisters were not entitled to the 22 shares. The ultimate resolution was something that apparently no one anticipated at the outset of the litigation. The Alabama Supreme Court held that the Family LLC was dissolved upon L.B.’s death and that the Family LLC must distribute 25% of its stock holdings to each of the four siblings. [3] In other words, the business succession plan that L.B. had formulated completely collapsed, and, although no one knew it at the time, it collapsed immediately upon his death. Why?

A Transfer of Economic Rights Does Not Confer LLC Membership

In Alabama, as in Indiana and in most (maybe all) other states, the rights afforded to members of LLCs are more akin to the rights of partners in partnerships than to the rights of shareholders of corporations. A share of stock in a corporation is a form of intangible personal property, and it generally represents all the rights of a shareholder, including both economic rights (e.g., the right to receive dividends) and non-economic rights (e.g., the right to vote for directors). Except where noted, the relevant provisions of the Alabama statute applicable to the Whitfield case [4] are similar to corresponding provisions of the Indiana statute. The balance of this article focuses on how the same facts would likely play out under Indiana law, with one return to Alabama law to discuss a difference between the two statutes.

Like the rights of a partner in a partnership, the various rights afforded to a member in an LLC are not all treated alike. The member’s economic rights, including the right to a share of profits and losses and the right receive distributions, are encompassed by the defined word “interest.” [5] Non-economic rights include the apparent authority to bind the company; [6] the right to manage the affairs and make decisions of the company; [7] the right to inspect and copy certain company records; [8] the right to sue in the name of the company; [9] the rights of a creditor to the company with respect to distributions. [10] In addition, the operating agreement may confer other rights on the members. [11] However, of all these rights, the statute designates only the interest as a property right. [12] The others are better characterized as either contractual rights or as personal rights (or perhaps “status rights”) acquired through admission as a member.

As a property right, interest can be assigned, but the assignment of interest does not, by itself, confer the status of membership or any of the other rights of a member. An assignee of interest becomes a member only with the consent of the other members or to the extent the operating agreement provides other paths to membership. [13] Otherwise, the assignee does not even acquire all the rights within the definition of “interest;” the assignee receives only the right to receive distributions. [14]

Effect of the Death of a Sole Member

On the other side of the equation, when the sole member of a limited liability company dies, the deceased person is no longer a member, [15] and the LLC is automatically dissolved, [16] unless the operating agreement provides for another result.

For a limited liability company formed after June 30, 1999, dissolution can be avoided if the operating agreement contains at least one of two provisions: (1) a provision for admitting a new member after the dissociation of the last remaining member [17] or (2) a provision permitting the deceased member’s personal representative (or a designee of the personal representative) to become a member by agreeing to become a member and to continue the LLC’s business. [18] Either way, however, a new member must be admitted within 90 days after the dissociation of the last remaining member. For any limited liability company, regardless of the date of formation, dissociation (and hence dissolution) can be avoided if the operating agreement provides that a member is not dissociated by death – which presumably means that someone, most likely the deceased member’s personal representative or heir, steps into the shoes of the deceased member.

So what would happen with an Indiana LLC, having none of the above provisions in its operating agreement, if the sole member were to die leaving all his rights, title, and interest in the LLC to his four children? Precisely what happened in the Whitfield case: The sole member would be dissociated upon death; the children would not become members; the LLC would be dissolved; and each child would receive 25% of the LLC’s assets remaining after payment of the LLC’s creditors.

Other Scenarios

Lest the business lawyers think this is a concern only for the estate planners, there are other ways for a limited liability company to find itself with no members and therefore dissolved by operation of law.

Under Ind. Code § 23‑18‑6‑5 and either Ind. Code § 23‑18‑6‑4(e) or § 23‑18‑6‑4.1(e), a member that assigns the member’s entire interest to another person ceases to be a member. For a limited liability company formed after June 30, 1999, the assignee can become a member in accordance with an agreement between the assignee and assignor. There is no similar provision for companies formed on or before June 30, 1999, but it seems that an agreement by which the assignor consents to the admission of the assignee and simultaneously assigns the assignor’s entire interest to the assignee would serve as admission by the unanimous consent of the members under § 23‑18‑6‑4(b). But what about an agreement that assigns the member’s entire interest to another but says nothing about admitting the assignee as a member? Absent an applicable provision in the operating agreement, the statute provides no other means for admitting the assignee, and it appears that a purported assignment of all the rights, title, and interest that a member holds in the LLC effectively transfers only the right to receive distributions, dissociates the assignor, and dissolves the LLC.

Another route to a memberless LLC arises in the context of a partnership, limited partnership, or limited liability company that is the parent of a wholly owned subsidiary LLC. If the parent is dissolved, Ind. Code § 23‑19‑6‑5(a)(5) provides that it is dissociated as a member of the subsidiary upon commencement of the winding up of the parent’s affairs, thus dissolving the subsidiary for the lack of members. In addition to the possibility that the parent would have chosen to sell the subsidiary as an ongoing business rather than dissolving it. Of course, one issue is that the parent may not want to dissolve the subsidiary but rather to sell it as an ongoing business in the process of liquidating the assets of the parent. A more complicated question is the authority to wind up the business of the subsidiary. If the subsidiary is a manager-managed LLC, the manager may wind up the business under Ind. Code 23‑18‑9‑4. That would likely be true even if the manager is the now dissolved and dissociated parent because winding up the affairs of the subsidiary would be a part of winding up the affairs of the parent, which is the only post-dissolution activity the parent is permitted to undertake. However, only the members have the authority to wind up the business of a member-managed LLC, and once the parent has begun to wind up its own business, the subsidiary no longer would no longer have any members.

Although all of the above examples contemplate the dissociation of a sole member, in principle, the issue arises whenever a limited liability company has no members, regardless of how that situation came about. Naturally, that is most likely to happen when the LLC has only one member.

A Statutory Solution?

It is a matter of perspective and opinion whether the possibility of LLCs with no members deserves a statutory solution or merely serves as a cautionary tale for lawyers. Interestingly, however, the Alabama statute provides a solution, a way that either L.B. Whitfield or his children could have avoided dissolution of the Family LLC, but they missed it.

Ala. Code § 10A-5-7.01 provides:

A limited liability company is dissolved. . . .

(3) When it has no members, unless either of the following applies:

(a) The holders of all the financial rights [19] in the limited liability company agree in writing, within 90 days after the cessation of membership of the last member, to continue the legal existence and business of the limited liability company and to appoint one or more new members.

(b) The legal existence and business of the limited liability company is continued and one or more new members are appointed in the manner stated in the governing documents.

In other words, the dissolution of the Family LLC – which L.B. almost certainly did not intend to occur – could have been avoided in either of two ways. (1) The operating agreement of the Family LLC could have anticipated the issue and dealt with it appropriately. (2) The four children could have made a written agreement to continue the business of the LLC and for all of them to be admitted as members, provided it was done within 90 days of L.B.’s death. For whatever reasons, neither happened.

Even so, if the goal is to provide ways to permit the preservation of the LLC as an ongoing entity whenever possible, the approach in the Alabama statute is superior to the approach in the Indiana Business Flexibility Act. The 1999 amendments to the Indiana statute improved it by adding two mechanisms for the admission of members to LLCs that have none, [20] but those mechanisms are available only if the operating agreement provides for them, and even then one of them is available only if the LLC is left memberless as a result of the death of the last remaining individual member. A provision similar to Ala. Code § 10A‑5‑7.01(3)(a), [21] permitting the holders of all the interest in a memberless LLC, regardless of how it comes about and with no particular language in the operating agreement, to continue the business and to admit new members by unanimous written agreement would be even better.

But what about the situation in Whitfield, where the operating agreement did nothing to avoid dissolution and the people who held interest after dissolution occurred missed the window of opportunity to do something about it?  Certainly, it seems that there must be some reasonable deadline by which the interest holders must act in order for the rest of the world, including company creditors and the Internal Revenue Services, to have some certainty that the LLC’s dissolution is really final. One possibility would be to recognize the dissolution of an LLC only upon filing of articles of dissolution, but that would be inconsistent with the usual understanding of dissolution and likely create more problems than it solved.  Alternatively, it might be possible to recognize the interest holders’ implied consent.  In other words, the LLC would be treated as if it were not dissolved if the holders of interest behaved as if the LLC were not dissolved and as if they were, in fact, members.  

At any rate, the above suggestions are merely that – suggestions.  An analysis of their relative advantages and disadvantages goes well beyond the scope of this article.

[1] The company was originally known as the Alabama‑Georgia Syrup Company, so named because L.B., Sr. was from Georgia and his wife was from Alabama. The company still sells a product called ALAGA Syrup.

[2] The facts are from L.B. Whitfield, III Family LLC vs. Virginia Whitfield, No. 1110422 (Ala. 2014) available at and from the Whitfield Foods website.

[3] Recall that L.B. died in 2000. The Family LLC filed its complaint for declaratory judgment in 2010. During that ten‑year period, the LLC and its members behaved as if the LLC had not been dissolved but rather was an ongoing entity. The Supreme Court considered and rejected theories of waiver, laches, and equitable estoppel based on the passage of time and the behavior of the parties.

[4] Ala. Code § 10A‑5‑1.01 et seq, which has been replaced with Ala. Code § 10A‑5A‑1.01, et seq. effective January 1, 2015.

[5] Ind. § 23‑18‑1‑10.

[6] Ind. § 23‑18‑3‑1 (for companies formed on or before June 30, 1999) or Ind. Code 23‑18‑3‑1.1 (for companies formed after June 30, 1999). Perhaps apparent authority is not best characterized as a “right,” but for these purposes we’ll ignore that quibble.

[7] Ind. § 23‑18‑4‑1. Specific rights are addressed by other provisions, for example by Ind. § 23‑18‑9‑1 and § 23‑18‑9‑1.1 with respect to decisions to voluntarily dissolve the LLC.

[8] Ind. § 23‑18‑4‑8.

[9] Ind. § 23‑18‑8‑1.

[10] Ind. § 23‑18‑5‑9.

[11] Ind. Code§ 23‑18‑1‑16.

[12] Ind. Code. § 23‑18‑6‑2.

[13] Ind. § 23‑18‑6‑4 (for companies formed on or before June 30, 1999) and § 23‑18‑6‑4.1 (for companies formed after June 30, 19999).

[14] Ind. § 23‑18‑6‑3 or § 23‑18‑6‑3.1 (for companies formed on or before June 30, 1999 or thereafter, respectively).

[15] Ind. § 23‑18‑6‑5.

[16] For a limited liability company formed on or before June 30, 1999, the event of dissolution is the dissociation of a member. Ind. Code. § 23‑18‑9‑1(b)(3). For a limited liability company formed after June 30, 1999, the event of dissolution is that the LLC has no members. Ind. § 23‑18‑9‑1.1(c).

[17] Ind. § 23‑18‑9‑1.1(c)(1)(A).

[18] Ind. § 23‑18‑9‑1.1(c)(1)(B).

[19] The definition of “financial rights” roughly corresponds to the Indiana statutory definition of “interest.” Ala. Code § 10A‑5‑1.02(3).

[20] Ind. Code § 23‑18‑9‑1.1(c)(1) and (2).

[21] Compare Ind. Code § 23‑18‑9‑1.1(c)(1) with Ala. Code § 10A‑5‑7.01(3)(a). The Indiana provision permits the personal representative of the last remaining member to become a member, which is obviously applicable only if the last remaining member is a deceased individual; it simply doesn’t help with any of the other scenarios described above. In contrast, the Alabama provision applies anytime the LLC has no members, however that situations came about. In addition, the Indiana provision must be triggered by the operating agreement; not so with the Alabama provision.