Most small businesses now are being organized as limited liability companies (“LLCs”) because of the limited liability afforded owners of the company and the favorable pass thru income tax treatment of the company’s earnings. In addition, management of the company can either be retained by the owners—that is, the members–of the company, or centralized in one or more managers, who may, but need not, be owners. It is this flexibility in management structure that sets LLCs apart from other forms of business entities.
LLCs managed by its members (so-called Member Managed LLCs) are appropriate where all of the members wish to be actively involved in the management and business operations of the company. On the other hand, if some or most of the members are merely passive investors, do not wish to participate in the management or business of the company, or lack the business skills necessary to manage the business, management of the LLC is usually delegated to those qualified members who want to be involved in the company’s business, or to a skilled outside third party non-member—this is known as a Manager Managed LLC. Managers are usually elected by the members of the LLC.
The Company’s operating agreement, which need not be filed with the state, is an agreement among the members (and non-member manager, if applicable) as to the management, finances, and operation of the LLC and its business. The operating agreement will generally set forth the member votes necessary to act and manage the company in a Member Managed LLC, and the limitations, if any, on the authority of a manager in a Manager Managed LLC to manage the affairs and business of the LLC. In a Manager Managed LLC, for example, oftentimes the operating agreement will prohibit the manager or managers from acting on certain fundamental matters—often referred to as major decisions– without first securing the prior approval of the members, while in some cases the manager will be given the absolute authority to manage the LLC without any participation by the members. Likewise, if a Member Managed LLC’s operating agreement only requires a majority vote of members, a member with more than 50% of the membership interests will usually have the right to control the actions of the LLC.
In a Member Managed LLC each of the members is generally deemed to be an agent of the LLC and, as such, legally authorized to act on behalf of and bind the LLC to contracts or other business obligations with third parties without the approval of the other members. Whereas in a Manger Managed LLC, only the manager—and not members who are not named as managers– can act on behalf of the LLC. So, if you intend to have passive investors or members with limited business skills in your LLC and are concerned that an inexperienced investor or member might make imprudent or unauthorized business decisions that could be injurious to your LLC, you would probably want to have a Manager Managed LLC. If, on the other hand, you and your co-owners all want to be involved in the management and day to day business of your LLC and are each capable of doing so, you would most likely want to be a Member Managed LLC.
Whether an LLC is recognized as Member or Manager managed and whether its members can legally bind the LLC depends on the laws of the state in which the LLC was organized. In a vast majority of states, an LLC is deemed by default to be Member Managed by all of its members, as in a general partnership, thus usually giving each member the legal ability to act on behalf of and bind the LLC. However, depending on the laws of its state of organization, an LLC can opt out of the default rule by designating in the articles of organization it files with the state or in its operating agreement that it is to be Manager Managed, thereby preventing any member, other than the manager, from participating in management or legally binding the company. Virginia and Maryland, for example, require that such designation be included in the LLC’s articles of organization filed with the state, while the District of Columbia and Delaware permit that designation to be made in the LLC’s operating agreement.
How an LLC is to be managed can be one of the most important decisions in the organization and structuring of an LLC and should not be made without the advice of legal counsel. The business attorneys at General Counsel PC are well versed and experienced in determining the appropriate management structure for an LLC and would be glad to assist you in making such a decision for your LLC, as well as helping you organize an LLC and drafting its operating agreement. For a no obligation consultation call, feel free to call or e-mail Norman Eule at email@example.com or 703-556-0411.
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