Given its flexibility regarding structure and tax treatment, limited liability companies (LLC’s) remain one of the most popular entity types in the State of Washington for real estate and business ventures. When forming a new LLC, or purchasing interests in an existing LLC, you will be faced with whether the LLC is or will be manager-managed or member-managed. This is an important distinction as it will affect the apparent authority and duties of the Members and Managers and other important aspects of the LLC.
An LLC is comprised of its Members, which are the owners of the company with certain voting and profit sharing rights. If, as is most often the case (particularly with small businesses), an LLC is member-managed, all Members share responsibility for the day-to-day running of the business. A manager-managed structure may be preferable in some situations, such as when the business or ownership group is too large or diverse to warrant shared management by all of its Members, or if the Members want to be passive investors and not involved in the day-to-day operations of the business. If an LLC is manager-managed, the Managers may (pursuant to the LLC Agreement which governs the rights and duties of the Members and Managers) have the authority to make certain decisions on behalf of the company in the ordinary course of business with and without consent of the Members.
With a manager-managed LLC, it is particularly important that the LLC Agreement properly detail, among other things: (a) which decisions can be made by the Manager alone and which decisions (typically defined as “Major Decisions”) require some level of Member approval; (b) whether the Manager is entitled to compensation for its duties; (c) under what conditions a Manager may be appointed and removed; (d) how much time and effort the Manager is expected to devote to the business and internal affairs of the Company; and (e) the liability of a Manager for acts conducted within the scope of its authority and those which constitute fraud, intentional misconduct, bad faith or gross negligence. Additionally, if there is more than one Manager, the LLC Agreement should detail which decisions require consent of some or all of the Managers.
As you can see, whether an LLC is member-managed or manager-managed is an important decision, the framework of which must be properly detailed in the company’s LLC Agreement. If you have any questions regarding LLCs or any other entity formation and/or governance matters, please contact Joshua Pope or another attorney in MPBA’s Business Law Department.