By: Tamara Pow, Esq.
One of the first decisions you have to make when you decide to form a limited liability company is whether the company will be managed by the members or by one or more managers. This decision is so important, it is one of the very few items of information the California Secretary of State requires on the Articles of Organization – the basic document that is filed in order to create your LLC. The Articles require that you state if the LLC will be managed by one manager, more than one manager, or by all of the LLC members.
Unless the Articles say the company is manager managed, the business of the LLC will be managed by all of the members. So, unless the Articles of Organization or the Operating Agreement specifically state that the company is manager managed, every member is an agent of the company and may act on its behalf, and such act will bind the LLC unless the member has no such authority and the person that member is dealing with has actual knowledge that the member has no authority. In other words, unless you want each member to be able to bind the company in its business or affairs, you should mark one of the boxes for manager managed on your Articles of Organization and specifically include manager authority provisions in your LLC’s operating agreement.
I recommend you always clearly call the managers of the company “Managers” whether or not they are also members. I dislike the term “Managing Member” because it is unclear without reading the operating agreement of the company whether a Managing Member is just one of many members in a member managed limited liability company, or whether the Managing Member is a Manager that also happens to be a member (but possibly has more authority than other members if they are not also managers). “Manager” and “Member” are much clearer terms that provide more information to third parties dealing with the LLC.
Once you have decided whether your LLC will be manager managed or member managed, you need to take it a step further and decide how many managers you want and how they will make decisions. You could choose to appoint or elect a number of managers to be on a board of managers, like the board of directors of a corporation. Or, you could choose one person to be the sole manager. Then you can think about whether the Managers, or their appointees, should have authority over different areas of management like officers in a corporation. You can even name Managers, or others, to officer positions in the company’s operating agreement.
Now that you have decided that your LLC will be manager managed, and how many managers you will have, there are many other considerations that should be thought out and included in your operating agreement, including methodologies to elect and remove managers, powers of managers (and limitations on those powers), deadlock provisions if you have an even number of managers, fees paid to managers by the company, and other transactions between a manager and the company.
Tamara B. Pow is a founding partner of Strategy Law, LLP in downtown San Jose, California where she practices business and real estate law including formations, operations, transfers, conversions and dissolutions of LLCs and other business entities. Her personal experience investing in real estate limited liability companies as well as her MBA and real estate brokers license help her in advising owners of limited liability companies and other business entities.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.