Virginia Limited Liability Company (LLC) Membership Interests Analogous to Partnership

The Virginia Supreme Court ruled on November 4, 2011, that membership in a Virginia limited liability company is comprised of two components–a control interest and a financial interest–and that only the financial interest is transferable by will when a member dies. Moreover, the court held that a devisee or assignee of a financial interest has no control interest in the limited liability company without becoming a member, just as a control interest in a partnership “cannot be bestowed on another by the unilateral act of a partner.”

The financial interest involves only the right to share in the company’s profits and losses and to receive distributions. It does not entail the right to participate in the management or control of the company’s affairs.

In 1991, the Virginia legislature enacted the Limited Liability Company Act, creating the limited liability company as a hybrid entity, similar in some respects to a partnership and in other respects to a corporation. The statute provides that the transferability of a member’s interest in an LLC should be similar to the transferability of a partner’s interest in a partnership. Last Will.jpgUnder the Uniform Partnership Act, the transfer of a partner’s interest in a partnership entitles the transferee only to the financial rights, not the control rights.

The case arose after Admiral Dewey Monroe Jr. died in 2004. He and his wife, Lou Ann Monroe, had formed a Virginia LLC in which Dewey held an 80 percent interest and Lou Ann a 20 percent interest. The operating agreement provided that upon Dewey’s death, Lou Ann would become managing member and Joseph Monroe would become the successor managing member. When Dewey died, it was discovered that his will bequeathed his entire estate to his daughter, Janet Ott. Janet asserted that this bequest transferred his membership in the company to her, including the right to control the company with the 80 percent interest. Acting on that assumption, she promptly called a meeting of the Company and proceeded to putatively remove Lou Ann and Joseph from their positions and elect herself as the Company’s new managing member.

She then filed a declaratory judgment suit in Stafford County Circuit Court seeking judicial confirmation that her actions were legitimate. The court rejected her arguments, deciding that Dewey was “dissociated” from the LLC under Virginia law as soon as he died and that he had no authority to transfer the LLC control rights to her. The Virginia Supreme Court agreed with the court below, finding that Ms. Ott lacked authority to remove the LLC’s managing member and successor managing member. “It was not within Dewey’s power under the Agreement unilaterally to convey to Janet his control interest and make her a member of the Company upon his death because the Agreement could not confer that power on him,” the court ruled.

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