Every limited liability company (LLC) that has more than one member needs to address how the members will make decisions, both collectively and individually. Will the members manage the LLC directly or through managers? How will voting be handled? What matters will require approval of the members? This article addresses some key issues that members should consider when creating a limited liability company.
A limited liability company may be managed directly by its members or may provide for management by one or more managers. In Illinois, whether an LLC is to be member managed or manager managed is required to be specified in the Articles of Organization, so the initial decision must be made at the time the Articles of Organization are filed. In Delaware, by contrast, any LLC may be managed by a manager and no provision is required in the LLC’s Certificate of Organization.
Member-Managed. In a member managed company in Illinois, each member has equal rights in the management and conduct of the company’s business. Except for certain actions specified in the Illinois LLC Act, any matter relating to the business of the LLC may be decided by a majority of the members. In a member-managed LLC, each member is an agent of the LLC for the purpose of its business, and an act of a member, including signing an instrument in the company’s name, generally binds the LLC. This is distinguished from a manager-managed LLC, where a member is not able to bind the LLC.
Manager-Managed. A manager-managed LLC is analogous to the corporate structure where shareholders elect directors to manage the day-to-day affairs of the business. In a manager-managed LLC, members do not participate in the day-to-day management of the limited liability company. The number of managers and method by which they are appointed or elected is not specified in the statute, so the LLC’s operating agreement must fill the gap.
While the managers have day-to-day control of the LLC, the operating agreement may limit the authority of the managers and require member approval on key business decisions. However, each of the managers is, by law, an agent of the company and has the power to bind the LLC by any act that is in the ordinary course of business unless the third party has knowledge that the manager lacks actual authority to bind the company.
The operating agreement should also provide a method for removing the manager. Under the Illinois LLC Act, a manager may be removed by a majority vote of the members of the limited liability company.
Matters in Which Members May Vote. The voting rights of members of an Illinois LLC may be broad or limited in scope (e.g., following either a partnership or corporate structure), or some membership interests may not have voting rights at all. If broad rights are to be provided, consideration should be given to the procedure which is to be followed in obtaining such approval (e.g., via meeting or written consent). Matters which are often considered significant for voting rights purposes are as follows: top 10 LLC services
Appointment of a manager
Admission of new members
Issuance of new interests to existing members
Amendments to the operating agreement
Sale of the business or a substantial portion of the assets
Merger or combination with another business
Approval of an annual budget
Dissolution of the company
Distributions to members
Voting may be done on a per member basis, by membership interest or in classes. If there are multiple classes of membership interests, those classes may be afforded different voting rights.
The default rule for an Illinois LLC requires only a majority approval for most actions in connection with the business and affairs of the LLC. The LLC’s operating agreement should specify whether a majority, supermajority or unanimous consent is required for a particular matter.
Under the Illinois LLC Act, unless the operating agreement provides otherwise, a new member may not be admitted in the LLC without the unanimous consent of the other members. The operating agreement should specify the procedure for admitting new members and set forth the approval required, e.g., unanimous, supermajority, majority or consent of the manager.
Voting Rights of a Transferee. If the LLC permits a member to transfer his or her interests to a third party, the transferred interest will include the member’s right to share in the profits and losses of the company and the right to receive distributions from the company, but the assignee may not participate in the management of the business unless he or she is admitted as a member.