Over the next few months we’ll be discussing some of the common terms of an Limited Liability Company operating agreement in a series of posts. The operating agreement provides the framework for operating and managing 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 RCW 25.15 . In this first post, we’ll discuss the management structures and choices available for an LLC.
Key Feature: Flexibility
In Washington, the LLC statutes are incredibly flexible. LLCs are easily adaptable to the changing needs or circumstances of the members and the business. 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: (1) LLC members may select one or more managers (manager-managed); or (2) LLC members may collectively manage the company (member-managed). Under Washington law, the default management structure is member-managed. If LLC members elect to be manager-managed instead, the LLC can indicate this in its operating agreement. 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, management can be arranged in a variety of ways. It is 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 operate and manage the business. Here, members may elect to restrict management from signing certain contracts on behalf of the LLC or selling certain company assets.
Having established what actions a manager can or can’t take, the operating agreement should further provide how management 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,” but cannot take “other significant actions” without a consensus among all managers or members.
Laying out clear provisions that detail how your LLC will be managed can streamline the decision-making process and reduce the risk of management conflict in the future.
Stay tuned for the next post in this series that will detail the economic structures and choices within an LLC operating agreement.
If you have any questions about forming a LLC or drafting an operating agreement for your LLC, please don’t hesitate to contact us today.