LLC Members & ManagersWhat You Need to Know About Each of Them!
Managing a limited liability company (LLC) is the next thing you will need to focus on after you have successfully filed its articles of organization with your presiding Secretary of the State.
The key to effectively managing a limited liability company to ensure it is not hindered from attaining its success and continuous profitability is by knowing who the business’ members are while also being aware of who functions as managing members.
Each individual limited liability company will have its own distinct operations that give rise to understated nuances.
What is the Owner of a Limited Liability Company (LLC) Called?
Owners of a limited liability company are known as members.
There are some members of a limited liability company that may function as managers.
When the members of a limited liability company manage the LLC themselves, this is referred to as a “member managed” limited liability company.
On the other hand, an alternative route the members of an LLC can take is to hire external services or third parties outside of the limited liability company itself to manage the business for them.
When members of an LLC hire an entity outside of their company to manage their business for them, that is referred to as a “manager managed” limited liability company.
Who are the Members of a Limited Liability Company?
A certain document that serves as an internal governing body by stating the by laws of how a limited liability company operates is what will identify who the members of an LLC are.
This document is known as the Operating Agreement.
It is the Operating Agreement that states the nature of the rights and responsibilities each member has which also serves as a way to prevent conflicts from happening in the future.
Operating Agreements are signed documents that members have come to agree upon when it comes to their division of the limited liability company’s profits and losses.
Operating Agreements are comprehensive and detailed documents that also specify the members’ structure of receiving distributions and the structure of participation in the management of the limited liability company.
In order to form a limited liability company, state regulations require to have at least one member that owns the limited liability company.
Drafting and implementing an operating agreement for limited liability companies that are only made up of one LLC member or owner is relatively straightforward and simple.
A limited liability company with only one member will make ownership, decision making and the control of management rest on the shoulders of only one decision maker which means that this one owner gets to solo all of the operation’s benefits but at the same time, this owner will also bear the burdens of the business on their own.
Examples of structures of ownership that can exist in a limited liability company are as follows:
- Two members. One member is a real estate developer and the other is a financial institution that plays the role of providing the bulk of the equity needed for a project.
- A single purpose managing member working with one or more other members. The managing member complies with the requirements of commercial mortgage backed securities (CMBS) lenders which may include independent directors or managers.
- Two or more distinct and unrelated entities forming to engage in business ventures.
- Two or more family related members forming to own a family business.
Limited liability company members can have interests that they own in an indirect manner.
This happens in cases like when a limited liability is formed by two families. It is possible to have one member in each family own a separate limited liability company.
In that case, individual family members may also indirectly have interests in the limited liability companies formed.
Limited liability company members can form groups designed specifically for purposes that involve decision making.
The right to decision making can belong to a group with a designated representative rather than having every member a direct decision making owner.
What Titles Do Limited Liability Company Members Have?
Entrepreneurs who own a limited liability company are known as members. In the state of Delaware, the law refers to limited liability company members as managers.
Simultaneously holding several varied titles and positions in a limited liability company is possible for its LLC members.
Documents that need to be signed, require the member signing on behalf of the limited liability company to list or specify their positions or titles whether they are the president, manager or the equivalent authority to prove that they have the capacity to put an approving signature.
The most common authoritative officer positions members of an LLC hold are that of president, secretary or treasurer.
It is possible for one member to have all three positions.
It is also possible to have third parties hold those positions as an alternative to having the different members of the LLC hold those positions.
How to Add Members to a Limited Liability Company
You will first need to refer to the limited liability company’s operating agreement to know who can and cannot be admitted as members.
From there, you will also need to use the operating agreement to know how to document the interests of the members to be added.
Once that is done, an “Amended and Restated” operating agreement will need to be drafted to replace the previous one that has not included the additional members yet.
The names of the new members will need to be added to the list of existing members on the amended operating agreement.
Sections will also have to be included that list how many voting and non-voting units each new member owns.
Lastly, the capital contributions of the new members need to be listed to declare how much each has paid for their share of ownership in the company.
Unanimous member resolutions can be drafted to explicitly state that every existing member approves the addition of the upcoming members of the limited liability company.
What is the Maximum Number of Members in an LLC?
Technically, there is no limit to the number of members that can belong in a limited liability company.
However, limited liability companies are customarily used as a business structure for families or closely related commercial ventures.
When a business has hundreds or even thousands of owners or shareholders already, it is common to have that structure incorporated as a corporation.
Does a Limited Liability Company Issue or Have Classes of Stock?
Limited liability companies cannot issue stocks as they do not have their own stocks to issue.
What limited liability companies do have though are units of ownership that are usually referred to as memberships units.
Limited liability companies can have several classes of members.
Each class can have their own distinct rights.
An example of how different classes and differing rights work in a limited liability company is when a certain class of members have preferred rights to distributions of the company.
The class with preferred rights may be considered superior to those of other classes.
It is also possible for one class of members to have rights to decision making while another class of members are more limited in their rights with no say on the decision making process at all.
Do Limited Liability Companies Have Directors?
Having management structures that borrow from the concept of corporate organizations is possible in a limited liability company.
An example of this is when a limited liability company operating agreement has provisions for management that operates under the directives of a board of managers or a board of directors.
Officers are then appointed by the limited liability company’s board of managers or directors.
An LLC’s board is typically a committee made up of individuals that the limited liability company’s members elect.
A limited liability company’s board of directors or managers will periodically hold meetings as they oversee the operations and direction of the limited liability company.
The management structures available to the limited liability company makes this business entity work well for ventures that are owned by families and where the siblings or family members involved might want a majority director vote over the company.
Does a Limited Liability Company Have a President?
A limited liability company has the freedom to give its chief executive officer almost any title.
One of the titles that can be (and is often) used is president. It is through a limited liability company’s operating agreement that the roles and duties of its president are specified.
In the hierarchy of the limited liability company, the president is the highest ranking manager.
It is the operating agreement of an LLC that grants the president powers of general management over the operations and business of the limited liability company.
The operating agreement also gives the president the full authority to open bank accounts.
Who are the Limited Liability Company Managers?
It is the operating agreement that tells what kind of management a limited liability company has which usually falls under either being a member managed LLC or a manager managed LLC.
Managers of a limited liability company have to sign signature blocks in contracts to signify that they have management capacity and are not just functioning as members that do not have the power to make decisions on behalf of the limited liability company itself.
This is identical to how, in a corporate setting, contracts are not signed by an entity that identifies only as a stockholder since a stockholder does not possess any authority of agency.
Thus, it is highly advisable for limited liability company managers to sign with their titles when appropriate whether they specify they are the manager or the managing member.
Operating agreements can reserve particularly significant decisions for its members to ponder on by specifying that the management of a limited liability company is to be composed of its managing members.
It can also be specified that the approval of particularly significant decisions be done at the hands of the limited liability company’s members.
These types of decisions are often referred to in an operating agreement as “Major Decisions”.
Instances of major decisions that are frequently found in a limited liability company’s operating agreements are inclusive of verdicts that involve financing, sale of LLC property, capital budgets and general operations.
Other instances of major decisions in a limited liability company include major capital expenditures, new business ventures, major leases and verdicts regarding insolvency or bankruptcy.
Operating agreements should also specify the extent of deviations a manager or managing member is allowed to indulge in.
Allowable deviations means that a managing member has a certain amount of how much they can stray from the approved budget without needing further approvals for the allowable deviations.
Major decisions in a limited liability company also span the admission of new or additional members and the dilution of the existing members’ interests.
It is the LLC’s operating agreement that will declare the requirements that need to be complied with in order to attain the approval of major decisions.
Every major decision made can be specified to require a certain amount of approval.
Different kinds of approvals to realize a major decision often include super majority approval or approval by all the limited liability company’s members.
Super majority approvals can mean two thirds of the members making the decision to approve or an approving percentage of at least 75%.
In the event that a limited liability company would need to file for bankruptcy or insolvency, a percentage higher than the super majority approval of major decisions is required.
Often, in the cases of bankruptcy or insolvency, an approval of at least 90% or even 100% of the members are required.
Possibilities of deadlock can happen when disagreements among members or managers occur involving an LLC that has joint management.
A well drafted operating agreement should anticipate the possibility of deadlock and provide provisions that address and solve the pending disagreement.
In certain situations, the ultimate decision will be up to one party with some disputes that may be solved through arbitration or mediation.
The chances of a deadlock not arriving at a resolution is present.
In cases where no agreement can be made, it may often be necessary to put an end to the relationship.
What is a Member Managed Limited Liability Company?
A limited liability company is member managed when no outside entity or third party is engaged to make the necessary decisions in operating the LLC.
It is the members of the limited liability company themselves that manage the LLC while also running the daily operations of the business.
In cases where a limited liability company is only composed of one member, it is that sole member that most often functions as the LLC’s manager.
In cases where a limited liability company is composed of multiple members, it is the standard to have either one or a select group of people or entities to serve as the manager.
This approach aids in simplifying and streamlining the operations of the limited liability company.
This is especially true for limited liability companies that are composed of passive or silent investors who do not want to involve themselves with the daily activities and responsibilities of the limited liability company.
Members that work as managers are known as the “managing member”.
It is possible for the limited liability company’s operating agreement to specify that the managing member be simply referred to as the “manager”.
An alternative is using conventional corporate officer titles if the members wish to do so by writing this down on the limited liability company’s operating agreement.
What is a Manager Managed Limited Liability Company?
A limited liability company is manager managed when a non-member, third party entity is given the authority to manage the LLC for its standing members.
In a manager managed limited liability company, an agency is often employed though the operating agreement of the LLC will need to specify the bounds of their exclusive authority in relation to the rights that are shared and retained by the LLC’s existing members.
Manager managed limited liability companies usually have the following provisions outlined in its operating agreement to detail the main rights of management retained by its members:
- The members reserve the right to replace the manager
- The members reserve the right to make and approve major decisions
Third party managers are beneficial in a structure composed of members that do not want to concern or involve themselves with the daily operations of the limited liability company such as the case when members of an LLC only want to function as passive investors.
Members of a limited liability company who prefer to only play the role of a silent investor would find themselves more comfortable and secure if the LLC delegates responsibilities of its management to external manager entities that are not existing members.
These external managers are typically executives that a limited liability company will pay to operate their business as they have years of industry experience in managing and operating businesses similar to the employing limited liability company.
Instances where limited liability company owners would opt to have a manager managed business structure include having a roster of members so large, complex and diverse that allowing each member a share in management would not be efficient or when members of a limited liability company are not particularly skilled when it comes to LLC management.
There are times when both the aforementioned situations come into play simultaneously.
Before forming a limited liability company, articles of organization will need a list of the members’ names.
Statements are also needed to declare whether a limited liability company will be managed by its own members or whether a dedicated external manager will be present.
Knowing who a limited liability company’s managers and members are is crucial not just when filing formation documents to the Secretary of the State but also to ensuring that the business operates the most efficiently and effectively it possibly can.
Each owner of the limited liability company is known as a member but not every member is known as a manager or a managing member especially when the limited liability company is composed of more than one member.
Managers are assigned or elected to make the decisions necessary to further a business.
A managing member or members, as it is referred to in legal terms, essentially leads the limited liability company.
Managing members are designated upon filing the LLC’s articles of organization.
The managing member or members of a limited liability company are the equivalent of a Chief Executive Officer (CEO) or a president of a corporation.
Members of a limited liability company on the other hand, are owners that have membership interests in the LLC in direct proportion to their capital contribution.
Members may or may not be managers of a limited liability company and merely serve as an owner that has invested funds into the business.
Some members may have voting rights while others do not, dependent on what is clearly stated in the limited liability company’s operating agreement.
Limited liability companies can opt to either be member managed or manager managed.
There will be certain situations where one would be more appropriate for the needs of the business than the other.
Member managed limited liability companies tend to be the more common choice amongst entrepreneurs choosing to form this kind of business entity.
Most limited liability companies have the propensity to be small businesses which tend to mean that there are limited resources at stake that do not necessarily require a separate and dedicated management level to operate.
Limited liability companies are simpler than corporations and are inclined to have streamlined organizational structures which results in lesser complexities, regulations and compliances that need to be adhered to.
Entrepreneurs who would like to run their own operations by playing an active role in the business from taking orders to providing services to making and selling their own products should look into forming a member managed limited liability company.
Most states classify limited liability companies as member managed by default so if no management structure is designated beforehand either in formation documents or an operating agreement, the LLC will be considered as an organization that is member managed.
Likewise, other situations that involve limited liability company members who do not want an active role in operations or would prefer to be passive investors instead would benefit from a manager managed structure.
Limited liability companies often appoint their own members as managers but nonmember managers can be particularly useful in certain scenarios.
Choosing to go down the manager managed route will need certain legal requirements to be complied with.
Either way, it is important to document your choice through your articles of formation and your operating agreement to clearly state the roles, duties, shares, contributions and responsibilities of each of your members and managers.