A limited liability company, or LLC, is a form of business entity often utilized by small businesses. One of the main benefits to operating a business as an LLC is the flexibility of an LLC. Unlike a corporation, which is required by law to have a board of directors, the owners of an LLC, which are called members, have the ability to determine how the LLC will be structured and operated.
An LLC is created when an individual, called an organizer, submits the articles of organization to a state business entity registration agency. Most states require an LLC organizer to disclose whether the LLC will be managed by members or managers. The members of an LLC are the individuals or businesses that own part of the LLC, while LLC managers are employees that do not own any share of the LLC.
LLC Operating Agreements
An operating agreement is a contract executed by the members of an LLC that governs how the LLC will operate. Typically, an LLC operating agreement provides a procedure for adding and removing LLC members and outlines how the LLC will share profits and losses among its members. An LLC operating agreement will provide a procedure for dissolving the LLC and liquidating LLC assets. Additionally, LLC operating agreements may cover other issues including the roles and responsibilities of LLC members and managers.
Member-Managed LLCs versus Manager-Managed LLCs
In operating a member-managed LLC, the members of the LLC must make all the necessary business decisions. If the LLC were a manager-managed LLC, the LLC managers would typically make ordinary business decisions, such as ordering inventory and making routine sales to customers, while LLC members would typically conduct a vote to make extraordinary business decisions, such as deciding whether to sell LLC-owned property or whether to dissolve it. In a member-managed LLC, however, the members of the LLC must make all business decisions.
Drafting an Operating Agreement for a Member-Managed LLC
Because conducting a vote of all LLC members for ordinary business decisions, such as whether to sell an item to a customer, is time consuming and impractical, it is especially important to determine how business decisions will be made in a member-managed LLC. In the LLC operating agreement, members should set forth which types of business decisions may be made by a unilateral decision of one LLC member and which types of business decisions require a vote of all LLC members. Additionally, the operating agreement of a member-managed LLC should also set forth which LLC members are authorized to make certain types of business decisions.