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LLCs Can Be Member-Managed or Manager-Managed

An LLC (limited liability company) is unique in that, by statute, it may choose one of two management structures. However, the default method of government for an LLC is member-managed. This is because the LLC Acts provide that management of the business and affairs of an LLC is vested in its members. However, by providing in its articles of organization or llc operating agreement (depending upon the state), the LLC may state that it is to be managed by managers.

Whether the LLC’s principals will choose member-management or manager-management depends upon a number of factors. These include how many members there are, their relationship to each other, their expertise in the type of business being operated, the size of the business, and the complexity of the operations. The greater the number of members and the larger and more complex the business, the more unwieldy it is to be member-managed.

Management by Members (Member-Managed)

In a member-managed LLC, every member is an agent of the LLC for the purpose of conducting its business and affairs. This can prove critical because every member can enter into contracts or other business arrangements that bind the company. Every member also has an equal right to manage the LLC’s business, unless otherwise provided in the operating agreement. An LLC may be set up with different classes of members, with one class having greater or different management rights than the others.

The operating agreement should set forth the vote required to take actions on the LLC’s behalf. Most Acts have default provisions addressing this issue (and they will govern the LLC unless the operating agreement provides otherwise). The default provisions typically provide that a majority vote of members is required for making most business decisions, with certain major decisions requiring a unanimous vote.

Unanimity is often required for:

  • An amendment of the operating agreement or articles of organization
  • The making of interim distributions
  • The compromise of a member’s obligation to make a contribution for his or her interests
  • The admission of a new member
  • Consent to dissolve the company
  • Consent to merge or convert the LLC

Other management details, such as when and where meetings are to be held, and requirements as to quorum or notice, should be set forth in the operating agreement as well. Members also may appoint officers and delegate to them the right to run the daily operations, while the members set policy and make major decisions. If there are officers, their duties will generally be set forth in the operating agreement.

Management by Managers (Manager-managed)

Management of an LLC may also be vested in one or more managers. With this option, the LLC may be managed like a corporation, with a central governing body deliberating and then acting on the LLC’s behalf, without having to obtain the members’ consent first.

The managers may run the day-to-day operations, or they may appoint officers to do that, while they set policy and make fundamental decisions. Managers are generally admitted as provided in the operating agreement. They may resign at any time, unless otherwise provided. The exact number of managers, or a minimum and maximum number, may be set forth in the operating agreement. Qualifications for managers may also be set forth. Unless otherwise provided, managers may, but need not be members.

Most management details are set forth in the operating agreement. These details would typically include where meetings will be held, quorum, voting, and notice requirements, whether participation by teleconference is allowed, whether committees may be formed, and how vacancies will be filled. Some states have detailed default provisions dealing with meetings, voting and other management issue. Others have very few default provisions dealing with these matters.

Fiduciary Duties

The people managing an LLC, whether they are members or outside managers, owe special duties to the LLC and its members called “fiduciary duties”. Most LLC Acts have a provision defining those fiduciary duties. However, the Acts differ significantly in what is required and what duties can be waived by the members via the operating agreement.

In general, however, a member in a member-managed company, and a manager in a manager-managed company owe the LLC and its members the duty of loyalty and duty of care. These duties would, for example, prevent the member or manager from profiting at the LLC’s expense, competing with LLC, making less than fully informed decisions, and engaging in grossly negligent or reckless conduct.

Liability of Managers

Managers are not personally liable for the limited liability company’s debts and obligations solely by reason of their status as managers. However, while managers are not liable to third parties, they may be held liable to the LLC or its members. For example, a manager may be liable for a breach of fiduciary duty, a breach of the operating agreement, or for voting for an unlawful distribution of the LLC’s assets.

Indemnification

Indemnification provides those managing a limited liability company with financial protection against expenses and liabilities incurred in defending themselves against claims based on conduct undertaken in their official capacity, by requiring or permitting the company to provide reimbursement.

Many LLC Acts have a provision dealing with indemnification. Some have a general statement that an LLC must indemnify members or managers for liabilities they incurred in the ordinary course of the business of the company. Others require indemnification where the manager or member was successful on the merits of a lawsuit, and permit indemnification where the person lost the lawsuit, but was found to have acted in good faith and for a purpose reasonably believed to be in the LLC’s best interests.

Other statutes do not specifically require the LLC to provide indemnification, but instead state that the LLC has the authority to indemnify its managers and members. In these states, the LLC may set forth the circumstances under which it will indemnify managers and members in its operating agreement.

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