The California Limited Liability Company (LLC) is a business entity favored by many businesses because its corporate-like limited liability protections and its relatively informal structural and governance requirements. It also allows “members” (the LLC term for owner) to take advantage of the favorable tax treatment afforded to partnerships.
The California Corporations Code allows for two LLC management situations that should be considered prior to formation.
1. Management by all members: The Code’s default provisions provide that the LLC will be managed by all of its members unless its articles of organization state otherwise.
Before choosing an all-member management structure, the members should give careful consideration to how the day-to-day operations of the business will be carried out. Here, all members will generally have the authority to act on behalf of the LLC, binding it to any agreements he or she executes. Choosing this option does help avoid imposition of state and federal securities laws for each member, but it may complicate the businesses operations if some members choose to be less involved with the business.
2. Management by one or more managers: If your business opts for this type of management, no member, acting solely as a member, has the power to bind the LLC. This authority is reserved for the designated manger(s).
Managers can be elected or removed by the vote of a majority in interest of the members. These managers can be members, or they can be individuals without any ownership interest in the LLC who are selected (hopefully) for their experience and expertise. In either case, managers, if there is indeed more than one, have equal authority to manage the business. Unless the operating agreement provides otherwise, decisions will be made either by a majority vote of managers or by unanimous written consent.
LLC members may opt to go this route if one or more of them intends to be more of a passive investor in the venture. If so, it is important that those non-managing members consider the impact of securities laws which may require them to either register their LLC interest as a security, or seek an exemption to registration.
