What Pennsylvania law says
Pennsylvania's LLC statute (Title 15, Chapter 88) treats a member's death as a dissociation. Their management and voting rights end. What's left, their "transferable interest," passes to the estate, which can receive distributions but generally can't run the business. Nothing in the statute forces the company or the surviving owners to buy that interest.
In a corporation, it's often worse for the survivors. The shares themselves pass to the heirs, voting rights and all, unless a shareholder agreement says otherwise.
Your operating agreement or shareholder agreement can change all of this. That's the point: the default rules are the plan you get if you don't write one.
Where it goes wrong in real life
- The silent partner you didn't choose. A spouse or adult kids now share in profits from a company they've never worked in, and they want those distributions.
- No money to buy them out. The surviving owner wants to buy the share, the family wants to sell, and nobody has a few hundred thousand dollars sitting around.
- The valuation fight. With no agreed formula, the family's number and the survivor's number can be very far apart.
- The bank line and the bonding. Lenders and sureties often lean on the owners personally. When one of them is gone, credit and bonding capacity can tighten right when the company needs them most.
The default rules are a plan. Just not one you'd ever choose.
The fix: a buy-sell agreement, with money behind it
Your attorney drafts who buys a departing owner's share, the price formula, and the triggers: death, disability, retirement, divorce.
Life insurance on each owner puts the buyout cash in place at the moment it's needed, so nobody drains the operating account or borrows against equipment.
Values move. A valuation from 2015 sitting in a drawer is one of the most common ways these plans fail. Review it every year.
Why older agreements need a second look
In June 2024, the U.S. Supreme Court decided Connelly v. United States. It held that when a corporation owns life insurance to buy back a deceased owner's shares, the insurance proceeds count toward the company's value for federal estate tax, and the obligation to redeem the shares doesn't offset them. For larger estates, that can change the math on company-owned redemption plans. Many owners are having their attorney and CPA review whether a cross-purchase structure makes more sense.
Q4 is the right time to do this
Your CPA is already looking at the books for year-end. That makes it the easiest time to update the business valuation, check that your agreement still matches reality, and confirm the coverage still matches the number.
I'm not an attorney or a CPA, and I don't draft agreements. I work alongside yours to make sure the money is there when the agreement says it has to be. See buy-sell and key person coverage.
Common questions
What happens to my share of an LLC when I die in Pennsylvania?
Under Pennsylvania's LLC law, death ends your membership. Your estate generally keeps your economic rights (a share of distributions) but not management or voting rights, and the law does not require anyone to buy your interest. Your operating agreement can change these defaults. Talk to a Pennsylvania attorney about your specific situation.
Does a buy-sell agreement need life insurance?
Not legally, but without funding, the surviving owners often can't afford to buy the share when it's needed. Life insurance on each owner is the most common way to make sure the cash exists at the moment of a death.
What did the Connelly decision change?
In Connelly v. United States (2024), the Supreme Court held that life insurance proceeds a corporation receives to redeem a deceased owner's shares count toward the company's value for federal estate tax, without an offset for the redemption obligation. Many owners are reviewing company-owned redemption plans with their advisors.