Under the new Pennsylvania Uniform Limited Liability Company Act of 2016 (the “Act”), which recently went into effect as of April 1, 2017, a limited liability company (“LLC”) no longer has to declare if it is member-managed or manager-managed in its Certificate of Organization filed with the Pennsylvania Department of State. However, the question of management structure of an LLC is still an important one.
Under the provisions of the Act, an LLC is member-managed as a general rule unless the written operating agreement of that LLC specifies otherwise. But what exactly does this mean? In a “member-managed” LLC, the day to day management of the LLC is the responsibility of its owners, who are called the members. The members are responsible for making all decisions relating to the operation of the business of the LLC, such as signing checks, opening, maintaining and closing the LLC’s bank accounts, hiring employees and independent contractors, and signing all legal documents such as contracts and loan documents.
On the other hand, in a “manager-managed” LLC, the members designate a certain person or persons to manage the LLC (the “Manager”). The Manager is identified in the LLC’s written operating agreement which also spells out the scope of the Manager’s responsibilities. The members are often “hands-off” when it comes to actually running the LLC on a day to day basis, and count on the Manager to make all decisions. Nothing prevents a member from also being named as the Manager, but an individual who is not a member may also serve as the Manager.
But why choose one management structure over another? As LLC’s tend to be small businesses and only have a small number of members, the member-managed structure is most common. The members typically want to be “hands-on” with their business and have complete control over its transactions and operations. There are situations, however, when a manager-managed LLC is the more appropriate choice. For example, if an LLC is owned by another legal entity such as a corporation, a partnership or a trust, appointing a Manager or a group of managers can streamline the operation of the LLC. In other cases, an LLC is larger and has many members, some of which do not intend to be involved in the daily activities of the LLC. A manager-managed structure will be appropriate for this LLC.
The members often want to limit what the Manager can do in a manager-managed LLC. The powers of the Manager can be limited in the operating agreement by having the members retain certain powers. For example, a Manager may be responsible for most operating decisions but not decisions relating to borrowing money, selling assets outside the ordinary course of business or making expenditures exceeding a specified dollar amount. These “major” decisions will need the agreement of the members. In addition, the Act provides that the members must retain the power to approve all mergers, interest exchanges, conversions, divisions or domestications, and an operating agreement cannot vary the right of a member to authorize these actions.
In summary, it is very important to have a well drafted written operating agreement prepared when an LLC is first established which spells out, among other things, exactly how certain decisions will be made. Each LLC is unique, and figuring out which LLC management structure fits your specific situation should be discussed with a corporate attorney with experience in this area. If you would like to discuss the structure of an LLC or of any other business entity, please call our office.