Why manager-managed LLCs are the way to go
Most companies formed these days are limited liability companies, or LLC’s, rather than corporations. LLC’s offer the same protection for their owners against personal liability, but have much more flexibility in their structure and management than corporations. When forming an LLC for your business, a critical consideration is who will have the authority to manage it. An LLC can either be managed by its owners, who are called members, or by designated managers, who can still be members. Whether the LLC is member-managed or manager-managed is an important decision, and this post will discuss why
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Member-management and its risks
When an LLC is member-managed, all of the members have the legal authority to take part in its day-to-day management. This includes voting on management decisions, such as entering into contracts or leases, taking out loans, and other actions, which require the consent of a majority of the members. Each member is considered an “agent” of the LLC, meaning that he or she has the authority to bind the company legally on matters in the ordinary course of the company’s business.
This means that any member of a member-managed LLC can sign a contract that is binding on the company, unless the other party knew that member did not have authority. For example, if a member signs a lease for office space, or a contract to purchase some product or service, hiring employees, those actions are binding on the LLC. A major obligation, such as taking out a bank loan or purchasing naming rights to the local football stadium, might require more than just one member’s signature, but it is not worth taking such a chance.
In some LLC’s, only some of the members are active in daily management, while others may be passive (for example, they are investors or family members, or performed some service in return for a small membership interest). You don’t want inactive members to have the authority to legally obligate the LLC without the knowledge or approval of the active members. When there are passive members, it is preferable to have a manager-managed LLC.
Manager-managed LLCs less risky
When filing articles of organization to form a new LLC, you can designate whether it is member-managed or manager-managed (you can also amend the articles of an existing LLC to do this). When an LLC is manager-managed, the members must designate who the manager or managers are. A manager can be a member but does not have to be. In a manager-managed LLC, the managers have the authority and agency power to manage and legally obligate the LLC. The members, as members, have no such authority anymore.
Especially in the case of a manager-managed LLC, it is critical to have a written operating agreement setting out the authority and duties of the managers, who the managers are, how they are appointed and removed, and what if any authority members still have. Also, if an LLC is larger, it makes sense to have managers, who may or may not all be members.
If you would like more information or have questions about your LLC, please contact Mark Spitz at Spitz Legal Counsel LLC, at 720.575.0440 or mark@spitzlegalcounsel.com.