50/50 members of an LLC without an operating agreement seem to have equal management power, equal equity, and equal voting rights and neither one can make a decision regarding the LLC without the consent of the other. This is what many people assume and quite often they are wrong.
50/50 members of an LLC do not have to agree on every decision, each of them has the power to bind the LLC and conduct business for the LLC without getting the consent of the other member, as long as these activities are “for apparently carrying on in the usual way the business of the limited liability company” (Section 412(a) of the New York Limited Liability Company Law). This, by the way, is not only true for 50/50 members, but for all members of an LLC.
For legal advice, call 212 2531027 or contact me here.
The Law
Under the law, Section 412(a),
“Unless the articles of organization of a limited liability company provide that management shall be vested in a manager or managers, every member is an agent of the limited liability company for the purpose of its business, and the act of every member, including the execution in the name of the limited liability company of any instrument, for apparently carrying on in the usual way the business of the limited liability company, binds the limited liability company, unless (i) the member so acting has in fact no authority to act for the limited liability company in the particular matter and (ii) the person with whom he or she is dealing has knowledge of the fact that the member has no such authority.”
Usual way of Business Activity not requiring consent
So each of the 50/50 members of an LLC can do as he or she pleases as long as the activity is “for apparently carrying on in the usual way the business of the limited liability company”. What that means is that usual business activity does not require the consent of the other member. Even if it is entering into a contract for the LLC. Anything that is day-to-day, usual, customary business activity, is within the power of each member. Even a loan taken out by a member in the ordinary course of business does not have to be approved by the other member (Merrell-Benco Agency, LLC v. HSBC Bank USA, 799 N.Y.S.2d 590)
Activity outside the usual way of Business
What activity of 50/50 members of an LLC is not within such power? One member hired an attorney for the LLC to go against the other member of the LLC. The court found that the attorney was not authorized to act for the LLC (Caplash v. Rochester Oral & Maxillofacial Surgery Assoc., 881 N.Y.S.2d 270).
Tailor your operating agreement to provide for limitations
Section 412(a) only applies if your LLC does not have an operating agreement that provides some other rules. If there is no operating agreement, the default rules described above apply. By the way, the majority of clients approaching me about this topic do not have a proper operating agreement. Don’t feel bad about not having an operating agreement, it is what it is, but – public service alert – it is a very bad idea to get involved as a member in an LLC without a proper operating agreement.
50/50 members of an LLC running around and making decisions for the LLC can be a bad idea, even if these activities are in the usual way of your LLC’s business. To prevent this, you should have an operating agreement that requires that certain decisions, maybe the really important ones or making purchases or commitments over a certain dollar amount, do require the consent of a majority or even all of the members.
