May 112015

The Roles of the Major Players in an LLC

(This is Part 2 of our LLC Series) The following is a brief description of the roles of the major players in an LLC — the members and the managers. Although the following is written as if members and managers are separate persons, the same individuals could serve as members and managers.

MEMBERS
The members own the LLC and provide the capital with which the LLC commences its business.  In a member-managed LLC, members by definition manage the business of the LLC. In a manager-managed LLC, members as a group often do not take an active role in running the business.  Normally one or two members will be intimately involved in the day-to-day operations of the LLC, and other members will be passive, non-active investors. Beyond electing the managers and voting on certain key events in the LLC’s life, the members of a manager-managed LLC entrust management of the LLC to the managers (much like the shareholders of a corporation entrust management of the corporation to the directors and officers of the corporation).  Matters requiring member votes will be discussed in a later article.

MANAGERS
Managers are elected by the members. At the outset managers can simply be specified in the operating agreement, which is of course approved and signed by all members. Thereafter, if the operating agreement so permits, members can hold annual or other regularly scheduled meetings and elect the general manager and any other managers of the LLC. Managers manage the business and affairs of the LLC and exercise the LLC’s powers. Managers may either perform these responsibilities themselves or these responsibilities can be performed by officers and employees under the direction of the managers.

In performing these responsibilities, managers have the same fiduciary duty with respect to the LLC and its members that a general partner owes to a general partnership and the other partners of that partnership (there is no specified fiduciary duty for members). It is permissible to modify and otherwise refine the fiduciary duty of the manager in the operating agreement, and it is advisable to do so. Typically the operating agreement will specify fiduciary duties such as the “duty of loyalty” and the “duty of care” for LLC managers.

The duty of loyalty dictates that a manager must act in good faith and must not allow personal interests to prevail over interests of the LLC and the LLC’s members. A standard example that raises these issues is a proposal that the LLC enter into a transaction that benefits a manager, or involves the manager in a conflict of interest between the manager and the LLC or its members. Such transactions are often called “self-dealing” transactions. They are not prohibited, but such transactions must be predicated upon (i) full disclosure, (ii) proper approval from disinterested managers and members, and (iii) fairness to the LLC and its members.

The duty of care requires a manager to be diligent and prudent in managing the LLC’s affairs. This is sometimes referred to in corporate law as the “business judgment” rule. If a manager makes a decision, conscientiously and without fraud or conflict of interest, such manager will not be second-guessed by courts based on how that decision happens to work out for the LLC. A manager is not held liable merely because a carefully made decision turns out badly.

Like a corporation, the LLC members and managers can appoint officers for the LLC who serve at the pleasure of the managers. The officers perform the bulk of the day-to-day operation of the LLC’s business. Normally an LLC will want at least a general manager (or president), a chief financial officer, and a secretary. More than one of these offices can be held by the same individual. An LLC may have additional officers. These additional officers are either appointed by the general manager or another officer if such officer has been delegated authority to make such appointments.

The following is a brief summary of the standard duties of the following officers. All of these could be modified by the managers.

  1. General Manager or President. The general manager is the chief executive officer and general manager of the LLC unless the LLC has a chairman of the board and has designated the chairman as chief executive officer. The general manager has general supervision, direction, and control over the LLC’s business and its officers. The general manager can also be called the president of the LLC.
  2. Chief Financial Officer. The chief financial officer keeps the books and records of account of the properties and business transactions of the LLC. These duties include depositing corporate funds and other valuables in the name of the LLC and disbursing funds as directed by the managers.
  3. Secretary. The secretary of an LLC keeps the LLC’s articles of organization, operating agreement, record of members’ addresses and holdings in the LLC, and written minutes (if any) of the proceedings of the LLC’s members and managers. The secretary usually has the duty of giving notices to members and managers of members’ and managers’ meetings.

The information provided herein is not intended as legal advice and should not be acted upon. If you have additional questions about this subject matter or would like to consult with an attorney about this or related subject matters, please call or email Josef Cowan at the Cowan Law Group (949) 333-0919 or at jcowan@cowanlawgroup.com.

Filed by Joe Cowan, May 11, 2015