LLC Operating Agreements: Voting Rights

By Cindy DeRuyter, J.D.

LLC Operating Agreements: Voting Rights

By Cindy DeRuyter, J.D.

Limited liability companies (LLCs) with multiple owners, called members, should include voting rights in the company's operating agreement. Those voting rights determine how key business decisions are handled. The operating agreement should establish who has the right to vote, what those rights are based on, what types of matters members must vote on, and whether votes must have a simple majority or a supermajority to pass a measure.

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Differences Between Voting Rights and Ownership Share

As opposed to corporate common shareholders, whose voting rights depend on the percentage of ownership their shares represent, LLC members' voting rights are not automatically tied to their interest in the business.

Voting rights for LLC members may be distributed in several different ways. Each member may have voting rights equal to their membership rights, similar to the rights corporate shareholders have. Or, instead, each member may have an equal vote, regardless of their investment in the business.

Other options include only giving voting rights to members who actively participate in the company's daily operations or specifying a subset of members who are the only members with voting rights.

Considerations When Determining Voting Rights

There is not a right or wrong way for LLC members to define and establish their company's voting rights in the operating agreement. LLC members should carefully evaluate different options and choose what makes the most sense for their business.

Adopting a simple approach where each member has equal voting rights no matter how much they have invested in the company can make voting simple and straightforward. However, if the LLC has an equal number of members, this approach can result in tied votes. If tied or deadlocked votes are a possibility, the LLC operating agreement should also specify how the decision will ultimately be resolved. This could mean bringing in an arbitrator or neutral third party as a tiebreaker.

Giving members voting rights in direct proportion to their share of ownership can also be problematic though, allowing majority members to join together to vote for or against a minority member's interest.

Specifying Voting Rights in the Operating Agreement

The company's operating agreement is the LLC's governing document. Including voting rights in the operating agreement is an important part of organizational governance. Therefore, decisions about who has voting rights and in what proportions should be clearly detailed. This should help protect the company if a member or former member tries to challenge or litigate a company decision.

Similarly, the operating agreement should clearly spell out whether a simple 51 percent approval is enough to move forward with a proposed change or whether some higher percentage vote must be met before a measure is passed. Sometimes, LLC members use a simple majority for some decisions but specify in the operating agreement that a 67 percent or other supermajority percentage must be met for other decisions, such as adding a new member.

LLCs whose operating agreements do not address voting rights will, by default, follow state laws. These may not reflect the members' wishes. When drafting an operating agreement, consider the attorney's advice to balance the voting rights the members would like to have that correspond with state laws.

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