Management Provisions in an LLC Operating Agreement

Management provisions in the LLC Operating Agreement deal with the management of the LLC business, which basically means decision-making for the LLC business. There are ordinary business decisions (think: buying copy paper at Staples, landing another customer, paying employees, enter into contracts….) and extraordinary business decisions, such as taking in a new owner, selling the entire business, hiring a lawyer for the business, merging with another business, and so forth.

Default NY LLC law Rules: Management by Members

As per NY LLC Law, by default, the LLC is managed by its Members (Section 401).  By default means that if you do not say otherwise in your articles of organization (the formation documents), your LLC is member-managed.  In a member managed LLC,  each Member has authority to make ordinary business decisions for the LLC and bind the LLC (i.e. enter into contracts in the name of the LLC) in connection with such ordinary type decisions. Extraordinary business decisions, however, require a formal authorization by the LLC Members (Section 412). The formal authorization can be by a majority vote of the LLC Members in a meeting or by written consent.

I hope you enjoy reading this blog post!

For legal advice, call 212 2531027 or contact me here.

Management by Managers

If you set forth in the LLC’s Articles of Organization (the document that was filed with the Secretary of State in Albany in connection with the formation of the LLC), that the LLC shall be managed by Managers, New York law has a second set of default rules applicable to the management of the LLC. In that case, only the Manager(s) have the authority to make ordinary business decisions for the LLC and bind the LLC (i.e. enter into contracts in the name of the LLC) in connection with such ordinary type decisions. Extraordinary business decisions require formal authorization by the Manager(s). If there is more than one Manager, a majority vote or written consent constitutes such formal authorization.  In that case, the LLC Members do not have any authorization to manage the day-to-day business affairs of the Company.

However, some extraordinary business decisions still require consent by the LLC Members. The law has a list of such extraordinary events (admit a person as a Member, dissolve the LLC, and so forth, look in Section 402 (c) and (d)).

Drafting your own Rules

When you read the NY LLC law, it almost always states “except as provided in the operating agreement…). This is your ticket to draft your own rules with respect to the management of your LLC.

Here are common matters written into LLC Operating Agreements with respect to the management of the LLC business:

No required Annual Meetings

By default, under NY LLC Law, meetings of LLC Members must be held annually. In order to keep the administration of the LLC lean and mean, many LLC founders decide to NOT require annual meetings of the LLC members and state as much in the LLC Operating Agreement.

Board of Managers

LLCs with many Members or Members who are not involved in the day-to-day management of the LLC can provide for a Board of Managers, similar to the structure in corporations.

LLCs can establish committees with responsibilities designated by the Board of Managers, Officers with special titles, such as President, Vice President, and others.

In that context, you can provide how many people should be on the Board of Managers and who are the initial persons to serve on the Board of Managers.

You can provide for special veto rights by certain people, how Managers are to be elected, and how they should be replaced or fired, if necessary.

In LLCs with only a few involved LLC Members and no Managers, you would also set forth who of the Members has authority to decide about day-to-day LLC business decisions and bind the LLC in contracts and agreements.  You could also provide for certain areas of responsibilities assigned to each managing LLC Member like Joe is responsible for the LLC’s marketing and Jack for sales and distribution of the LLC.

Retained Voting Rights of LLC Members

You can set forth a list of LLC business decisions that are so important to your LLC that they always require vote by the LLC Members, despite management of the LLC by Managers or a few select Members.  In that respect, you would also provide the level of consent that is required (majority, super majority, or unanimous consent) for such decisions.

I hope you enjoy reading this blog post!

For legal advice, call 212 2531027 or contact me here.

Voting Requirements

How many votes does each LLC Member or Manager have when it comes time to take a vote? The default rule for member-managed LLCs under NY LLC Law: The Members vote in proportion to each Member’s share of profits.  Example: Joe gave $10,000 as startup capital to the LLC and Jack gave $90,000.  Joe gets 10% of all the profits of the LLC and Jack gets 90%.  Joe gets 10% of the votes and Jack gets 90%, i.e. in matters requiring majority consent, Jack would always have the last word.

You can change voting requirements for the LLC in numerous ways.  There can be special groups of LLC Members who have voting rights different from other LLC Members and independent of their economic interest in the Company.  There can even be LLC Members who have no voting rights at all.

Should you be a manager-managed or a member-managed LLC?

This all depends on your specific situation.  If there are many members of the LLC and only a few of them are really involved in the actual management, I would recommend a manager structure.  You don’t want the passive members running around having authority of any kind.  If it is only two or three of you, and you are all motivated to contribute to the management of the business, a member-managed LLC may be more appropriate.

 

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027 or by email.