When setting up an LLC, whatever or whoever is helping you with the Articles of Organization asks a simple question: Is this going to be member-managed or manager-managed? This question is often met with a somewhat blank stare. So, if you did the same thing right now, you are not alone. You should see what happens when I ask a sole member LLC owner which they are.
If you choose to have a member-managed LLC, all of the members participate in running the business. All members play an active role in the day-to-day management of the company. That means that all members are authorized to act as agents of the company and can make the company obligated to do things. The members can sign contracts, take on liabilities, and generally act for the company. Usually, there is an operating agreement talking about what decisions need to be made by majority, super-majority, and unanimous votes.
If you choose a manager-managed LLC, designated people are delegated responsibilities to operate the business so that all the members don’t have to chime in on business decisions. The manager can be a member, or nonmember (yeah, an outsider) or a combination of members and nonmembers. There can be one or several managers. The non-manager members in a manager-managed LLC are passive investors who are not involved in most business operations unless the operating agreement says their vote matters. Usually, there is an operating agreement talking about which decisions the manager can make and which decisions are reserved to the members.
For example, some duties that might go to a manager are:
- Buy, sell, and lease Company property that does not represent a material part of the Company’s aggregate property;
- Insure the Company’s activities and property;
- Negotiate and sign all agreements, contracts, and other instruments or documents that are necessary or appropriate in the course for the Company’s regular business or that are authorized by general or specific action of the Members;
- Pay from the Company’s funds the consideration required under contracts or agreements;
- Establish and maintain books and records for the Company;
- Perform all other acts or activities customary or incident to the routine and day-to-day operation of a business such as that conducted by the Company;
Some duties that may remain reserved for members are:
- Sell, transfer, or otherwise dispose of all or substantially all the assets of the Company or its subsidiaries, whether in one or a series of related transactions;
- Borrow money or procure financing or refinancing, or mortgage or subject to another security interest any material portion of the Company’s assets;
- Issue additional Ownership Units;
- Enter into a merger transaction involving the Company in which the Members do not hold a majority of the economic and voting interests of the surviving entity;
- Amend the Articles of Organization or amend or revoke an Agreement.
Therefore, it is important (required even) from the very beginning to figure out who is calling the shots: members or managers for the LLC. Operating agreements can then help refine that decision. So, if you don’t know which you are, pull out your best Tony Danza impersonation and look at your Articles of Incorporation. Then, realize it was the kids in charge all along.