By: Tamara Pow, Esq.
Beware of LLC Managers that can’t be removed! As a business attorney, I work with many LLCs in San Jose and the Bay Area. Some of those have had to remove their LLC manager for one reason or another. I cannot overemphasize the importance of having operating agreement provisions in place to remove and replace a bad Manager.
In a previous blog I discussed the important decision of determining whether you will have a manager managed or a member managed LLC . Once you have decided that your LLC will be manager managed, you should carefully think through the methodologies you want to put in place to elect and remove a manager.
In some LLCs, the manager is another business entity rather than a person, usually either another LLC or a corporation. This is often the structure in real estate development and investment groups where the manager is an entity controlled by the sponsor. If this is the case, election and removal provisions are simple – the manager is stated in the operating agreement and stays as the manager unless a successor is elected by a vote of the members. This vote is usually a supermajority vote, but the percentage will depend on what percent of the company the sponsor insiders own.
However, if the manager is an individual, the LLC operating agreement should consider what happens when the manager resigns, is unable to serve due to a disability or other circumstances, dies, should be removed for cause, or when the members simply want someone else to act as manager. How the operating agreement is drafted for these situations varies greatly based on who is doing the drafting.
If I am representing the manager, I will want to make sure that she cannot easily be removed. In that case, the operating agreement will provide that the manager may only be removed for cause, and such removal requires a vote of a supermajority of the members which supermajority will include the manager’s percentage interest as a member.
If I am representing an investor, I want to make sure the manager can be removed if she is not doing the best job for the company. This could include having a new election every year, or making removal easier (by less than a majority, and not for cause), and replacement easier (by a simple majority of the membership interests).
In a family limited liability company, I will often dictate the initial successor manager in the operating agreement so that if dad is the manager and he dies or is unable to serve for any reason, there is clarity as to who will succeed him – whether that be mom, one of the kids, or an non-family member.
And all of these decisions get even more complicated if your operating agreement will have more than one manager. If you have multiple managers in one LLC, make sure you also consider whether certain groups of investors can elect a manager to represent their interests, or if all managers are elected the same way. And once they are elected, how will multiple managers make decisions? Do they all have to agree? Does a majority in the number of managers rule? These decisions lead to the next topic to consider when forming a manager managed LLC – what will the duties and powers of the manager(s) be? I will discuss powers of LLC managers in my next blog. Don’t assume the answers that are right for you can be found in a form document.
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 (both family LLCs and investment LLCs) 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.