You’re looking at forming your business as a limited liability company, or LLC. One thing to consider is how the company will be governed. This post will give an overview of how an LLC operates.
LLCs are governed by either members or managers. This is determined in the Company Agreement. In a member-managed LLC, the members control the Company. A manager-managed LLC adds another layer to the Company. At least one (or all) of the current members may be named managers of the company. For example, three people may start a manager-managed LLC with all three members named managers. However, later, new members are added to the LLC who remain members. Alternatively, managers do not necessarily have to be members of the Company. These managers will not vote on issues that require the members to make decisions, such as amending the Company Agreement.
The managers manage business of the LLC as outlined in the Company Agreement. Members may be employees of the LLC. In this situation, members will only have voting rights as allowed under the Company Agreement; however, certain situations require agreement of all members of the LLC, such as altering the Company Agreement in any way. It is important to note that this particular right can be removed in the Company Agreement. Therefore, when forming the LLC this is a significant point to discuss. When joining an LLC, you and your lawyer will want to review the Company Agreement to determine the status of this right.
There must be at least one manager in a member-managed LLC. The Company Agreement will state the number of managers. This number can be changed only by amending the Company Agreement.
The manager or managers serve for a set term. Managers are selected in one of three ways: 1) by the members; 2) by the Managers; or 3) by a class determined in the Company Agreement. A class will be described in the Company Agreement and could include a subset of members that are voting members and the rest of the members do not have voting rights.
What happens if a manager is removed or quits? A manager can be removed, with or without cause, at a meeting of the members of the Company’s members called for that particular purpose. This occurs when the members elect the managers. Other classes, or the managers themselves, can select the managers. In that case, whatever group that selected the manager is the group that is able to remove the manager. Again, this will procedure will be outlined in the Company Agreement.
In these votes, and in all LLC voting situations, each person’s vote carries equal weight. Ownership interest carries no weight when voting in an LLC.
When the managers meet to vote, a majority of the managers must be present to be able to vote. This also applies to members or to the voting class described above. This constitutes a quorum. A majority of those present must agree on the matter before it.
This should give you a basic idea of how an LLC operates. Decision-making is largely based on whether you select a member-managed or manager-managed LLC.