Every limited liability company (LLC) that has more than one member must address how the members will make decisions, both collectively and individually. Will members manage the LLC directly or through managers? How will the voting be handled? What issues will require member approval? This article addresses some key issues that members should consider when creating a limited liability company.
A limited liability company may be directly managed by its members or may arrange for it to be managed by one or more managers. In Illinois, it is required to specify in the Articles of Organization whether an LLC is to be managed by members or by a manager, so the initial decision must be made at the time the Articles of Organization are filed. In Delaware, by contrast, any LLC can be managed by a manager and no provision is required in the LLC’s Certificate of Organization.
Managed by members. In a member-managed company in Illinois, each member has equal rights in the management and conduct of the business of the company. Except for certain actions specified in the Illinois LLC Law, 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 its business purposes, 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-run LLC, where a member cannot bind the LLC.
Manager-Administered. A manager-run 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 are not involved in the day-to-day management of the limited liability company. The number of managers and the method by which they are appointed or elected is not specified in the statute, so the LLC’s operating agreement must fill the gap.
Although the managers have day-to-day control of the LLC, the operating agreement may limit the managers’ authority and require member approval of key business decisions. However, each of the managers is, by law, an agent of the company and has the power to bind the LLC for any act that is in the ordinary course of business, unless the third party has knowledge that the manager manager lacks actual authority to bind the LLC. company.
The operating agreement must also provide a method for removing the manager. Under Illinois LLC Law, a manager can be removed by a majority vote of the members of the limited liability company.
Matters on which members can vote. The voting rights of members of an Illinois LLC may be broad or limited in scope (e.g, following a partnership or corporate structure), or some member interests may not have voting rights at all. If broad rights are to be granted, consideration should be given to the procedure that must be followed to obtain such approval (for example, through a meeting or written consent). Matters that are often considered significant for voting rights purposes include:
- Appointment of a manager
- Admission of new members
- Issuance of new interests to existing members
- Modifications to the operating agreement
- Sale of the business or a substantial part of the assets
- Merge or combine with another business
- Approval of an annual budget
- dissolution of the company
- distributions to members
- Borrow money
Voting can be done by member, by membership interest, or by class. If there are multiple classes of membership interests, those classes may have different voting rights.
The default rule for an Illinois LLC requires only majority approval for most actions related to the LLC’s business and affairs. The LLC’s operating agreement must specify whether majority, majority, or unanimous consent is required for a particular matter.
Under Illinois LLC Law, unless the operating agreement provides otherwise, a new member cannot be admitted to the LLC without the unanimous consent of the other members. The operating agreement should specify the procedure for admitting new members and state the approval required, for example, by unanimity, supermajority, majority, or consent of the manager.
Voting rights of a transferee. If the LLC allows a member to transfer his interest to a third party, the transferred interest will include the member’s right to share in the profits and losses of the business and the right to receive distributions from the business, but the transferee will not be able to share in the company management unless admitted as a member.
These are some of the key issues that all Illinois limited liability companies with more than one member must address. Of course, how the problems are resolved in each instance will depend on many factors. A knowledgeable business attorney should help LLC members ensure that the governance arrangements they adopt are those that best meet their needs.
