A question I am frequently asked by LLC owners how LLC managers should get paid? A limited liability company operating agreement should clearly outline payments to both Managers and their affiliates, since these payments are typically made before a determination of whether cash is available for distribution to members.
If you are establishing or investing in a manager managed LLC, the operating agreement should specify how to elect and remove managers , and what powers those managers will have . The agreement should clearly state what fees will be paid to the managers by the company, both for performing their duties as managers and for other transactions between a manager and the company. If a manager will be paid a salary then market rates for those services should be considered, and the terms of employment should be set out in an employment agreement. If the manager will be paid special fees for performing certain duties that are outside of the normal day to day operations, those fees, in addition to the salary, should be approved by the members in advance by inclusion in the company’s operating agreement.
Here are some special fees often seen in real estate LLCs:
Acquisition Fee/Sale Fee: a fee for purchasing or selling an asset, usually based on a percentage of the purchase price of real estate and paid at the closing, often tied to market rates for outside brokers.
Asset Management Fee: an annual fee for managing the invested equity, usually a percentage of funds invested in the company.
Property Management Fee: a fee for acting as property manager, usually a percentage of gross rents, often tied to market rates for outside property management companies.
Construction Management Fee: a fee for managing major construction projects, usually based on the cost of construction.
Development Management Fee: a fee for managing development of a new project, usually based on costs of development.
Financing/Refinancing Fee: a fee for managing a financing of a project, often tied to market rates for third party brokers.
The operating agreement should also have some blanket provisions providing that the company will (or will not) reimburse the managers for their expenses in running the company, and for providing any services that are outside of the scope of a manager’s duties. For example, if a manager also happens to be a lawyer and chooses to draft contracts or represent the company in a litigation matter, the manager should be paid at market rates for those services if they are not an expected part of her duties. If details like this are considered in advance and provided for in the operating agreement, it is less likely a dispute will arise once operations are underway. This is particularly true when monetary payments are at issue.
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 representing real estate LLCs and other business entities. Her personal experience managing and 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.