Over the next few months we’ll be discussing some of the common terms of a Limited Liability Company (LLC) operating agreement in-depth. The operating agreement can be thought of as providing the laws of the business. The operating agreement provides the rights and obligations of the members including members’ management abilities and economic interests. Without an operating agreement, Washington LLCs are governed by the default provisions provided in Chapter 25.15 of the Revised Code of Washington. In this first post, we’ll discuss the management structures and choices available for an LLC.
In Washington, the LLC statute is incredibly flexible. LLCs are easily adaptable to the changing needs or circumstances of the members. There’s also flexibility when choosing the management structure of the company. The primary constraint on the management structure of an LLC is the imagination of the individuals drafting the LLC operating agreement.
Two Primary Choices
In the beginning, members of an LLC will need to decide between the two primary choices of management structures. There are two basic LLC management structures: (1) LLC members may select representative management (manager managed); or (2) LLC members may directly manage the company (member managed). Under Washington law, the default management structure is member managed. If LLC members elect to be manager managed rather than member managed, the LLC’s certificate of formation must state so explicitly. If the LLC is manager managed, the operating agreement should include details about how the managers are to be selected, the length of a manager’s term, and under what circumstances managers can be removed.
What Can They Do and How Do They Do It
Within the two primary structures, the management structure can be arranged in any number of ways. But it is most common to break down the management provisions of an operating agreement into two categories (what and how): (1) provisions affecting what actions managers can take, and (2) provisions affecting how managers make decisions.
Members should use provisions falling into the first category to define the scope of a manager’s authority to conduct the company’s business. Here, members may elect to restrict management from signing significant contracts on behalf of the LLC, or selling substantial company assets.
Having established what actions a manager can or cannot take, the operating agreement should further provide how managerial decisions are to be made. For example, the operating agreement may provide that managers can unilaterally take actions that are within the “ordinary course of business” (as defined in the operating agreement), but cannot take “other significant actions” (as be defined in the operating agreement) without a consensus among all managers or members.
Stay tuned for the next post in this series that will detail the economic structures and choices within an LLC operating agreement.