Inherent in the limited liability company structure is the right of owners, who are known as members, to participate in the management activities of the business. The jurisdiction in which you create the LLC provides the rights and authorities of an LLC manager if an operating agreement does not exist. In some instances, the rules governing managers diverge depending on whether the manager is an LLC member or a non-member employee.
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Statement of Authority
Many jurisdictions allow the LLC to file a statement of authority that provides the scope and limitations of authority of various managers of the business, regardless of whether the individual is an owner or employee. The statement provides sufficient notice to all parties in protecting the LLC from liability. Generally, these statements focus on the authority for managers to enter into real property transactions on behalf of the LLC or other business contracts that bind the company. In the event that a manager acts beyond the scope of authority, she may be personally liable to third parties for contracts.
As most states allow a member to participate in management activities of the LLC by virtue of possessing a membership interest, jurisdictions view an LLC as being member-managed unless an operating agreement states otherwise. This provides each member with an equal voice in determining how to run LLC operations. In the event of a disagreement among members, a decision is binding when a majority of the members agree. However, if a member-manager acts outside the scope of ordinary business practices, that act is not binding on the LLC unless there is unanimous agreement among all members.
Non-member managers who are employees of the LLC have similar authority as member- managers. However, most jurisdictions prohibit the employee from entering into contracts to sell all or a majority of the LLC’s property, to approve a merger or acquisition, from entering into transactions outside the ordinary course of business and from amending the operating agreement. Managers are not personally liable for engaging in these transactions if the members grant authority to them in the operating agreement, statement of authority or by unanimous consent.
All managers, whether a member or non-member, must adhere to the jurisdiction’s minimum standards of conduct. These standards include fiduciary duties such as the duty of care and loyalty. A duty of loyalty requires the manager to conduct business and make management decisions with the best interests of the LLC in mind. A manager who seeks personal gain from potential business opportunities or competes with the LLC is personally liable for the resulting damage and loss of profits to the LLC. The duty of care requires a manager to refrain from acting in a grossly negligent manner. To be grossly negligent, the manager must act with flagrant disregard of the law or acceptable business practices, or act with indifference to the safety of others. A manager is personally liable to the LLC for grossly negligent acts that result in loss or damage to the business.
References & Resources
- University of Pennsylvania Law School: Revised Uniform Limited Liability Company Act 2006
- “Wiley CPA Exam Review Volume 1”; O. Ray Whittington, PhD.; 2010