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An LLC customer recently changed its ownership structure. We are reevaluating a loan made to the LLC and discovered the change when reviewing a recent tax filing: one of eight original members died, with four new members replacing that member (the deceased member’s ownership interest was divvied up among the four new members). The deceased member was not the LLC’s manager and was not an authorized signer or guarantor for the loan account. Do we need to obtain an updated operating agreement from the LLC showing the new members? – IBA Compliance Connection

An LLC customer recently changed its ownership structure. We are reevaluating a loan made to the LLC and discovered the change when reviewing a recent tax filing: one of eight original members died, with four new members replacing that member (the deceased member’s ownership interest was divvied up among the four new members). The deceased member was not the LLC’s manager and was not an authorized signer or guarantor for the loan account. Do we need to obtain an updated operating agreement from the LLC showing the new members?

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In our view, you do not need to obtain an updated operating agreement under these circumstances, but you may wish to do so. Since the deceased member was not the LLC’s manager and was not an authorized signer or guarantor for the loan, the event of this member’s death probably is not material to your loan review.

However, only your bank can make this determination. Conceivably, there are scenarios where your bank might view the loss of this member or the addition of one or more of the successor members to be material to your underwriting considerations. Moreover, it is possible that changes have been made to the LLC’s operating agreement for the addition of the four new members that may affect your bank’s assessment of the LLC’s loan.

For resources related to our guidance, please see:

  • Illinois Limited Liability Act, 805 ILCS 180/35-45 (“A member is dissociated from a limited liability company upon the occurrence of any of the following events: . . . (8) In the case of a member who is an individual: (A) the member’s death; . . .”)
  • Illinois Limited Liability Act, 805 ILCS 180/15-5(a) (“Except as provided in subsections (b), (c), (d), and (e) of this Section, an operating agreement may modify any provision or provisions of this Act governing relations among the members, managers, and company.”)