While a limited liability company has roles that are the equivalent to officers and directors of a corporation, the terminology isn’t the same, and regulations governing their roles differ. It is this flexibility owners have in managing the company that has made an LLC an attractive option for small businesses.
Owners are Members
Owners of an LLC are called members under the state regulations which allow these companies to be formed. Members can be persons or companies, including other LLCs. Similar to a corporation’s board of directors, members comprise the governing board of an LLC. While multi-member LLCs are typical, all states also allow LLCs to have only one owner, called an single-member LLC.
Member Managed LLCs
By default, state regulations define new LLCs as member-managed LLCs. In a member-managed formation, every member is considered to be an active participant in the day-to-day affairs of the company, and each member’s ownership interest in the company is equal to the member’s actual investment. Under a member-managed LLC, any member can sign a contract that binds the company to an agreement. LLCs, however, can redefine member roles through an operating agreement.
Manager Managed LLCs
When filing articles of organization to form an LLC, the company founders can elect to file as a manager-managed LLC. In this approach, one or more members run the company’s regular operations, while other members take a “passive role” primarily through their investment. The roles of the members can be further defined by an operating agreement, required of LLCs in a few states such as Delaware, Missouri and New York. All states, however, allow an LLC to draw up an operating agreement. Even if it’s optional in your state, writing an operating agreement always is a good idea for clarifying management practices.
An LLC’s operating agreement can identify those members who will manage the company, or hire a non-member to manage the company. The operating agreement also can define the roles of the managing member. It can impose a business structure that could include a chief executive officer or president to run the day-to-day affairs of the LLC, a chief financial officer to handle the finances, and other officers with specific duties who report to the CEO. The agreement can further defines roles by assigning which managing members have the right to enter into contracts that bind the company. The operating agreement also may attribute profits that reflect more than the managing members’ actual financial investment and also consider their ongoing duties in running the LLC.
Passive or inactive members who invest in the company but don’t take part in its daily management still have rights to vote on key issues for the company, including the operating agreement and any subsequent amendments. They take part in all votes to assign or hire managers to run the company, set the number of members the LLC may have, approve the buyout of other companies or to decide on the LLC’s dissolution. The operating agreement can set how often the full membership should meet, and decide the criteria for issues that must be voted on by the membership.