LLC Management and Voting Basics

What You Need to Know about LLC Management and Voting

An LLC management can be set up as a member managed or manager managed as stated in its operating agreement. A member managed limit liability company Can be one that functions much like a partnership where the owners of the LLC, also run the company. It can also be one that functions more like a corporation where the members act as the Board of Directors, Officers or both. A manager managed limited liability company is one where some or all of the members are passive investors.

To properly protect your business your operating agreement should clearly specify the following

  1. Who will be in charge of the day to day operations of the company, (may specify management by one or more managers who may or may not also be members);
  2. What types or categories of decisions will require member approval (if not member managed);
  3. Under what circumstances a manager of a manager-managed LLC can be terminated or removed;
  4. The procedure for terminating or otherwise removing the manager;
  5. Whether or not the manager of a manager-managed LLC will at any point acquire units in the LLC, and if so, whether or not that ownership will be as an assignee with no rights to vote, or will be made a member with full voting rights;
  6. How managers will be selected;
  7. Whether or not there will be a manager review process, e.g. annual manager review setting forth criteria for raises, termination, etc.; and
  8. How managers will be selected. In short, specifying how the authority will be divided and where it will overlap as between the members, managers, board of directors, and/or officers will provide clear guidance on the company’s operations and minimizes the chances of an internal dispute.

One of the great features of limited liability companies which you can address in an LLC’s operating agreement is how the voting rights of the members will work.

LLC Management and Voting in Proportionate weight

The weight is apportioned commensurately with member’s ownership of units in the LLC, expressed in terms of percentage owned or units owned.

Example: Member A who owns 60% of the membership units, will always be the majority in terms of decision making.

One man; One vote

This type of voting structure is also known as voting on a “per capita” basis.

Example: Member A who owns 60% of the membership units, carries the same weight as the remaining member(s) despite owning more of the company. In a company of 5 members, 3 of the 5 members would constitute a majority, even if the 2 “outvoted” members collectively owned more than 50% of the LLC.

Assignee of Economic Interest Does not Include Voting Rights

An LLC membership interest is generally assignable unless otherwise prohibited by its governing documents. Membership interests can be assigned voluntarily through gift, devise, sale or involuntarily through circumstances such as incapacity, bankruptcy, assignment to creditors, termination, etc. An assignee, however, does not automatically become a member unless or until the Members vote to admit the assignee as a member. Otherwise, the assignee will receive some or all of the benefit of distributions and allocations of the transferring member, but none of the voting rights. Any of this, however, can be altered by language in the LLC’s operating agreement.

How Many Votes Will it Take?

Unanimous Consent

Some state’s default rules require a unanimous vote to:

  • Amend the company’s by-laws
  • Admit members after formation of the LLC
  • Amend the Articles
  • Expel a member
  • Permit a member to sell some or all of her interest in the LLC
  • Permit the successors/heirs of a deceased member to become a member (as opposed to being just an assignee)

Majority

Some state’s default rules require a majority of the vote to:

  • Merge, exchange interests, convert, sell substantially of the LLC’s assets
  • Voluntarily wind up the LLC
  • Reinstate the LLC after termination
  • Approve any activity
  • Admit new members
  • Amend the Articles or Operating Agreement
  • Approve the sale, mortgage or distribution of substantially all LLC assets

Voting Without a Meeting

Alternative means of voting can include informal votes: permitting votes through a series of phone calls, emails, discussions, etc.

Failure to object: You may want to include a provision stating that if a member fails to object or otherwise cast a vote when called upon to do so, such non-action will be treated as tacit agreement with the proposed action or resolution.

Proxies: If your intend that votes can be cast by proxy, make sure to include this option in the operating agreement

Delectus personae: an assignee is not entitled to participate in the management or exercise any rights of a member, and, often times an affirmative vote of all members is required to admit an assignee as a member. This may be undercut with the use of proxies. If it is you intent to have the actual will of the member reflected in the vote, as opposed to the substituted judgment of someone who has been designated as a proxy holder, then consider removing the proxy allowance all together, or, requiring that the member may only give a proxy to another member, or permitting proxies in certain circumstances only, or not giving the proxy holder any discretion on how she votes that proxy, i.e. issuing member must direct the proxy holder how to vote.

It is always wise to research your own state’s statutory scheme with respect to actions that require unanimous, majority or super- majority support. Failure to alter these requirements in your operating agreement may cause you to take on more of an onerous voting requirement than intended or may offer too much leniency on matters more serious within the context of your company. When contracting around you State’s statutory scheme, also be mindful of not undermining one provision by the crafting of another. For instance, if it is your intent to require a super majority of the vote to purchase assets valued at $500,000 or more, but another provision permits the bylaws to be amended by a simple majority of the vote, a member could, with a simple majority amend the bylaws to remove the asset purchase restrictions or amend them to be a simple majority.

Another example might be allowing your state’s default rules to dictate the winding up of a company, which, typically will take a super majority, but then would also allow the revocation of that decision by a simple majority. In short, maintaining consistency and harmony in drafting, so that one provision does not inadvertently defeat the purpose of another, will ensure less confusion and acrimony amongst the Members. You may also want to establish voting guidelines, (i.e. which of these will require a simple majority, super majority or unanimous consent?), for:

  • The votes needed to admit new members, (including admitting assignees as members)
  • Permissive withdrawals of membership by members;
  • Termination of members
  • Amending the operating agreement;
  • Allocation of profits, losses, distributions, expenses, depreciation, etc.;
  • Authority to bind the LLC to contracts
  • How ties will be broken
  • Dissolution / Winding down
  • Approval of the sale, mortgage or distribution of substantially all of the LLC’s assets
  • If capital calls will be permitted and if so, under what circumstances
  • Under what circumstances, capital distributions in any form other than money will be permitted.

We are not only well versed in Limited Liability Company Management and Voting, but we take the extra step of consulting with you to understand exactly what you have in mind for your LLC and what will be best for your unique interests. That way you can be assured of a strong and smoothly-functioning enterprise come what may. For a consultation call 304–921–0440 or email Romy@jflawfirm.com.

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