What can we do with inherited shares of stock in a non publicly traded LLC?
October 9, 2008 5:59 PM   Subscribe

My wife was gifted shares in a now deceased relative's two limited liability corporations. What should/can we do with them? What are our rights? What questions should we be asking?

About two years ago, my wife was gifted shares in two LLC's that are were owned by her now deceased grandfather. He wrote to her explaining that he had gifted the shares to her as a way of offsetting taxes associated with his trust. She was never given financial statements or dividends. Both LLC's are real estate based and make their money off of buying, selling and leasing mostly commercial property.

When asked about the companies, grandpa's wife who now runs things only has stated that they need to appraise all of the properties before we can talk about what our options are with these shares in the companies. What is our next step? What are our rights here? Who would be best to help guide us through this process...a CPA? What questions should we be asking? Thanks!
posted by pazoozoo to Work & Money (6 answers total) 1 user marked this as a favorite
Is grandpa's wife the CEO/President/Secretary of the company? What state is the company incorporated in? (Often not the state the company does business in).
posted by zippy at 6:20 PM on October 9, 2008

IANAL, IANAA, IAINYS (I am in New York State.)

An LLC is not the same as a corporation. While a corporation files business tax returns, in an LLC the profits/losses are passed through directly to the members and reported on their personal income taxes (on a Schedule K-1). The percentage of profits/loss that fall to the member of the LLC depends on how it was split in the Operating Agreement amongst the other members. (Was grandpa the sole member, or were there other people involved in the business?)

You might want to ask grandpa's wife for a copy of the Operating Agreements for the LLCs. If she doesn't have one, you should ask who set up the entity - they should have a copy.
posted by Lucinda at 7:00 PM on October 9, 2008

Her grandfather may have been a member of the LLC, in which case, what Lucinda says about the Operating Agreement is correct. The agreement will contain provisions for what happens in the event of a member's death.

The other possibility is that he simply owned shares that were sold as securities, and he isn't a member of the LLC. In that case, he probably signed a subscription agreement with the LLC to purchase the shares. The agreement will cover what your rights are as an heir to the shares.

You will probably want to talk to a lawyer, unless it's prohibitively expensive, to find out what your options are. The one thing you'll want to be aware of is that merely owning the shares will have tax implications for you. It depends on whether the LLC is treated as a partnership, S. corporation, or C. corporation. (Lucinda says that LLC's are pass through, that's not always the case.) As a shareholder in an LLC, you may be responsible for income taxes on any gains the LLC makes during the year. An accountant will be able to help answer any tax questions you have, once you've figured out what kind of agreement your wife's grandfather entered into.
posted by knave at 7:30 PM on October 9, 2008

1. Agree with asking for the Operating Agreement. Among other things, it will provide for her right to additional information.

2. Virtually all OAs provide that members (members, not shareholders) have the right to inspect the books and to make reasonable requests for additional information.

3. knave is right that "merely owning the [membership interests] will have tax implications for you". The company will provide her with a K-1 early each year that will specify what her share of income and of expenses have been. Fortunately, most LLCs that own and manage commercial real estate tend to come out on the positive side of things.

4. Lucinda said "in an LLC the profits/losses are passed through directly to the members and reported on their personal income taxes". That is usually but not always true.

You have not told us how large her share is. A 5% interest is much different from a 65% interest.

Some questions that she should ask:

a. Who is the company's accountant? are balance sheets prepared each year? are income and expenses tracked and documented? she should be provided with a copy.
b. Who are the other members? She may find an ally in someone who already has some inside information.
posted by yclipse at 7:51 PM on October 9, 2008

Oh, and it looks like grandpa's wife wants to discuss buying her out. She would have a right to have her own appraisal of the company's holdings in that event. It may cost some money, but she should exercise that right.
posted by yclipse at 7:53 PM on October 9, 2008

I'm not saying it's actually a problem, but it's a concern to me that you have not received any information like K-1s. The whole point of an LLC is to funnel and disperse tax liability. One run casually might be a bit late on paperwork sometimes, but then the IRS comes after you. This in fact means Y.O.U. So to protect yourselves you need to have some concrete information -- you may even need to file (Form 1040-X) amended income tax for the last two years.

Again, I'm not urging you to be suspicious, just cautious. Have the LLC taxes been filed and paid? What particular aspects of this trust caused them to gift you these shares? Since shares in an LLC can have unknown effects on your taxes, depending on what else you have going on, you should have been given this information at the start.

In short, you may not want to continue this relationship any longer than you have to. This means taking the buy-out.

Now, if you can be satisfied with the way thing are being settled now and the properties are being run, you may well want to hang on. But you need more disclosure before you can do that.
posted by dhartung at 9:19 PM on October 9, 2008

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