Joanna and her friend were doing so well selling their homemade jewelry to friends around town that they decided to form an LLC together so that they could start making sales online. They needed a business entity to open an account for the online payments. When they sat down together to fill out the LLC documents, they realized they’d need an LLC manager. Joanna’s friend said she had no interest in all the details. She just wanted to make jewelry to sell. The two decided that Joanna would be the manager. Because Joanna was going to handle all the marketing and money, while still making jewelry with her friend, they decided that Joanna would own two thirds and her friend one third of their LLC’s membership interests.
Members
The Uniform LLC Act and state LLC acts patterned after it vest the management of an LLC in its members. Corporations have a board of directors elected by the shareholders. LLCs do not have a board of directors. An LLC’s members are themselves, in effect, the LLC’s board of directors. The members together decide how to manage the LLC, as the operating agreement may provide. The operating agreement may, for instance, require that a majority of members determine disputed matters or that a majority of membership interests determine disputed matters. If you intend to control your LLC by maintaining at least 51% membership interest, then ensure that your operating agreement provides for management by a majority of interests rather than a majority of members.
Manager
An LLC’s members may delegate management to a manager. Most LLCs do so. Corporations have officers including a president, secretary, and treasurer, elected by the board of directors. A corporation’s board may also employ a chief executive officer (CEO) to manage the corporation’s daily affairs. By contrast, an LLC’s members only select a manager to lead the LLC’s operations. Your LLC won’t need officers. Remember, an LLC is a streamlined form of business entity, designed to ease formation and simplify management and administration. The LLC’s manager in effect serves as the LLC’s president, secretary, treasurer, and CEO all in one, and in every other administrative capacity necessary for the LLC’s operation. If, as is typically wise, you decide to delegate management to a manager rather than have all members manage together, your articles of organization and operating agreement should so indicate. The example operating agreements at the end of this book designate managers.
Appointment
Your LLC’s operating agreement should name the LLC’s initial manager. Because members sign the operating agreement to give it effect, members must agree on the initial manager the operating agreement designates. The LLC’s organizer, the one who drafts, signs, and files the LLC’s articles of organization, is often the LLC’s initial manager. The LLC’s organizer may have obtained a template operating agreement, filled it out with the organizer’s name inserted as the LLC’s initial manager, and presented the operating agreement to all members for signature. But the members must still agree on the initial manager, if they are to sign the operating agreement.
Choice
Be sure that you choose the right initial manager for your LLC. The members should have confidence in the LLC’s manager. Visionaries, individuals with hopes, dreams, and ambitions, form new business ventures. But visionaries don’t always have the administrative skills necessary to manage new business ventures. If you are the visionary forming your own LLC, you may want to manage it to ensure that it carries forward your vision. The same individual who organizes the LLC and owns all or a majority of the membership interest may also serve as the LLC’s manager. They often do so. But if you lack administrative time, skill, or interest, consider either recruiting another member to manage your LLC or managing yourself while retaining administrative support services.
Replacement
A majority of members or membership interests may vote to remove and replace an LLC’s manager, following any terms or conditions the operating agreement imposes. Your LLC’s initial manager, whether you or someone else, may decide to withdraw as manager, requiring a replacement. Members may decide together to rotate managers among two or more members. Or a majority of members or membership interests may decide to remove (fire) a manager in whom they have lost trust, replacing the manager with someone whom they do trust. In that way, members continue to control and, in effect, manage the organization, through their choice, evaluation, and replacement of managers.
Powers
Your LLC’s operating agreement should define the manager’s power and authority. Operating agreements typically first authorize the manager to do anything in the ordinary and usual course of the LLC’s business. Operating agreements then typically specifically authorize the manager to do certain acts common but not necessarily routine acts like enter into contracts, buy and sell property, sign checks or make electronic transfers up to $5,000, and retain and discharge employees. Operating agreements then typically expressly prohibit managers from doing other unusual acts, such as close or sell any substantial part of the LLC’s business, merge with another entity, or sign checks or make electronic transfers over $5,000. Think about the actions with which you would trust or not trust your LLC’s manager, and specify those powers and restrictions in the operating agreement.
Co-Managers
Your LLC’s operating agreement may authorize more than one manager. Designating co-managers in the initial operating agreement may be an appropriate compromise arrangement for an LLC having only two members holding equal interests and devoting equal time and skill to the LLC’s management. Operating by agreement of the co-managers may be appropriate, ensuring member involvement and control. But beware two cooks in the kitchen. Co-managers may be unable to agree quickly and consistently on ordinary and usual matters, slowing and complicating management. You may prefer to choose one manager, even if it means giving up a degree of day-to-day control.
Duties
State LLC acts commonly impose statutory duties on an LLC’s manager to act in good faith, with the ordinary care of a prudent manager under similar circumstances, and while reasonably believing the actions to be in the LLC’s best interests. State LLC acts also commonly impose on an LLC’s manager a duty of loyalty, to hold and turnover to the LLC any benefit from any LLC transaction or interest. Managers should not be diverting LLC opportunities for their own personal interests. A manager’s usurping a corporate opportunity for personal benefit may create a cause of action on the part of the LLC or derivative right on the part of members to recover the value of the lost opportunity, presumably along with discharge and replacement of the manager.
Liability
State LLC acts commonly eliminate the liability of a manager to the LLC for any loss from actions taken consistent with the above duties. As long as the manager acts in good faith, prudently, in the LLC’s best interests, and without intentional diversion of LLC interests, the manager should not owe the LLC reimbursement for any losses resulting from the manager’s actions in the course of LLC business. A manager would remain liable to the LLC for bad faith, self-interested, careless actions resulting in loss to the LLC, although the operating agreement may eliminate negligence liability. The manager should likewise not be liable to others dealing with the LLC, as long as the manager acts in good faith, prudently, and in the capacity as the LLC’s manager. The LLC may indemnify the manager for liability to others. If the LLC declines to do so, the manager may have a legal right to indemnity, enforceable in the civil courts, depending on the claims and circumstances.
Key Points
An LLC’s members manage the LLC.
An LLC’s members may designate a manager or co-managers.
An LLC’s members may remove and replace a manager.
An LLC’s manager has the authority the operating agreement provides.
An LLC’s manager must act prudently, in the LLC’s best interest.