Monday, November 22, 2010

Management Issues in LLC Operating Agreements

Upon forming a limited liability company (LLC), the founding members should have an operating agreement prepared by a lawyer. The operating agreement is the document that will govern the operations of the company and establish the rights and duties of the members. In most jurisdictions the law allows the parties to decide how the LLC will operate (with some limitations), even if a provision in the operating agreement varies from the LLC statute of that state. Therefore, preparing an operating agreement is an opportunity for the founding members to establish their own set of rules and regulations.

The members may want the company to be managed by a single managing partner or by multiple persons. The members need to carefully consider the implications of such shared management and artfully draft the operating agreement to account for potential disagreements amongst the managers and potential manager misconduct. The members also need to decide whether or not the managers will be able to engage in other businesses. If the members do not want the managers to be able to engage in other businesses (especially competitive businesses), the operating agreement must include such restrictions.

Some other issues to consider with regard to management of the LLC are:

1. If there are multiple managers, how will decisions be made (majority vote?)?
2. What will be the duties of the manager(s)?
3. How much power will be invested in the manager(s)?
4. What limitations will be placed on managers and reserved to the members?
5. How can managers be removed?
6. What will managers be paid?

Founding members of a limited liability company should not assume that the law will protect their interests when there are disputes amongst the members and managers. Rather, they need to make sure that the operating agreement clearly reflects their intentions and goals. Few, if any, of the form operating agreements found or purchased on the internet adeq uately address many of the concerns that will be important to the members of the LLC. Every LLC is different, and the operating agreement must be designed to afford the member the best chance for business success and the avoidance of conflict.

The attorneys at Gross & Romanick, P.C. have considerable experience drafting LLC Operating Agreements that effectively resolve management issues endemic to LLC governance. If you have an LLC and are unsure of how to organize the structure of management or want to memorialize the management structure that you have created, contact the attorneys at Gross & Romanick, P.C.