One of the key features in an LLC's operating agreement is an explanation of the voting rights of the owners, who are known as members. With most corporations, this is not an addressable issue, since stockholders are owners and can vote in proportion to their ownership percentage. However, LLCs function more like partnerships with ownership voting rights that should be clearly stated. For example, a member might own 45 percent of an LLC yet have not voting rights for company business decisions.
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Importance of Voting Rights
Unlike corporations, wherein the majority of stock ownership can make major decisions, LLCs must state how their members distribute voting rights. Therefore, voting rights can be more important than majority ownership in some cases. For example, if there is no operating agreement or the agreement is absent any voting rights declarations, all members must unanimously consent to take operating, financial, investment, or asset purchase decisions. Regardless of ownership percentage in an LLC, the voting rights policy determines the direction and management of the company.
Common Voting Rights
LLC operating agreements commonly specify one of two forms of member voting rights. One form permits voting power to reside in relation to the member ownership percentage. With this setting, a member owning 40 percent of the LLC has more votes than a member owning 5 percent of the company. A second common option states that each member, regardless of ownership percentage, gets one vote. Therefore, a five member LLC, with one member owning 60 percent and the other four members splitting the remaining 40 percent, with 10 percent each, still requires three of the five members to vote in favor of a question for an approval.
Voting Rignts Are Agreements
Unlike a corporation, wherein one entity can increase his voting power by buying or controlling more shares, LLC owners agree on company and member voting rights, stating them clearly in the operating agreement. For example, should a member with 60 percent ownership agree to have one vote, identical to all other LLC members regardless of ownership percentage, this plan will have valid legal standing. Should future disputes arise over this policy, they will have little legal power, since all members agreed to this procedure.
Member Managed LLCs Still Need Stated Voting Rights
Some erroneously believe that an LLC that chooses a member manager, need not be concerned with member voting rights. However, selecting a member to manage the LLC, with authority to execute contracts, make purchases, and strategic decisions, does not eliminate the need to specify member voting rights in the operating agreement. While member-managers function like corporate CEOs, with considerable authority, unless the LLC operating agreement specifically states that other members have no voting rights, members can still make decisions that override member-manager decisions.
References & Resources
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