If you’re considering starting a limited liability company (LLC), you will need to determine how the LLC will be managed. With an LLC you’re able to choose your management structure from several options. One is to elect a board of directors — but unlike corporations, LLCs are not required to have a board of directors. Whichever management structure you choose, it should be detailed in the operating agreement.
An LLC is a business entity that offers liability protection for owners, as well as pass-through taxation, much like a sole proprietorship. To learn more about LLCs, read this Step By Step article.
What Is a Board of Directors?
A board of directors is a decision-making group of people elected to represent shareholder interests. The board is usually made up of both internal individuals, generally executive-level management, and external individuals with relevant knowledge and experience. In the case of an LLC, the members of the LLC elects the board of directors.
Internal board members are generally not paid for their work as board members, but external board members usually are compensated. Most board decisions are broad in scope and include overall company strategy, goal setting, executive hiring and firing decisions, and executive compensation plans.
The board of directors will be guided by the LLC’s bylaws, which must be adopted to have a board of directors. The bylaws will specify how many board members there will be, how they are elected, and when, where, and how they meet. The board responsibilities, as well as management roles and responsibilities, will be detailed in the LLCs operating agreement.
What Is an Operating Agreement?
An operating agreement for a limited liability company (LLC) is an important legal document that details who owns the business and provides essential information pertaining to member duties. An LLC operating agreement establishes the financial relationship between members and the basics of the working relationships between those members and the managers who oversee daily operations.
An operating agreement is not usually required but is highly recommended. The operating agreement should clearly define:
- The percentage of each member’s interests in the LLC
- How profits and losses will be allocated to each member
- Each member’s rights and responsibilities
- The management structure and management roles of members
- The voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
If the LLC has a board of directors, the operating agreement will also include the role and responsibilities of the board members and how they are compensated. An LLC operating agreement provides legal and financial recourse for a number of situations. If conflicts arise between LLC owners pertaining to any of the following issues, the operating agreement will provide clarity.
The specific language of the operating agreement details exactly how such conflicts will be resolved. This document details how the business is structured, the dynamics of operations, and more.
Though certain states have default rules on the books that address some of the potential challenges that might arise between LLC members, the LLC operating agreement has the potential to override such presumptions.
What Do LLC Managers Do?
Most LLCs do not have a board of directors, and members or managers are in charge of all decision-making. An LLC offers its owner or owners considerable flexibility in terms of management. You can choose your management and operational structure.
As with other business entities, managers can play various roles. For example, you might have a Chief Executive Officer (CEO) and a Chief Financial Officer (CFO), as well as other managers who are delegated specific duties.
Managers, whether they are members or employees, have the ability to make critical decisions and perform important tasks for the company including:
- Entering into contracts
- Signing legal documents
- Managing bank accounts
- Hiring employees
- Getting financing for the company
Because of the important nature of management roles, choosing managers and the management structure of your LLC are critical decisions that should be made carefully.
In a member-managed LLC, the members (owners) of the LLC participate in the daily activities of the business. Most LLCs are member-managed because the majority are small businesses that cannot afford to hire a management team.
Many LLC owners prefer to have a member-managed structure because they want to be in control of decision-making and directly involved in the operations of the business. Unlike corporations, most LLCs do not have boards of directors to oversee the management. This means that whoever manages the company is in control of all decisions.
In most states, LLCs are considered member-managed by default unless they have specified that they are manager-managed in the formation documents or operating agreement.
In a manager-managed LLC, non-members are hired as managers. Some members still may be managers alongside the non-member managers, or none of the members can be managers. In this structure, any members who are not managers are passive investors and have no role in the operations of the company.
This structure works when some or all of the owners want passive ownership, or if there are too many members to all take part in managing the LLC. Another reason to choose a manager-managed structure is that you have members with limited management skills. Having a great business idea and the capital to start a company does not necessarily mean that someone can run a company. Hiring professional managers, in that case, can give the company a better chance of success.
Advisory Boards – An Alternative
Instead of a board of directors who will have binding decision-making authority for your LLC, you can instead appoint an advisory board. An advisory board provides non-binding strategic advice to the company’s managers. It’s made up of external members who have relevant industry knowledge and experience. An advisory board is elected by the members of the LLC.
Advisory board members are usually compensated with a small percentage of ownership in the LLC, or a small yearly stipend for their time. It is much less expensive than having a board of directors, as board member compensation can be very costly.
An LLC does not have to have a board of directors, but members can choose to have a board. Most LLCs choose not to have a board of directors so that members retain control over decision-making. LLCs more often have advisory boards, to provide non-binding professional advice.
It’s recommended when forming your LLC to consult with an attorney who can examine your company goals and help you decide which management structure is right for you, and whether to have a board of directors or an advisory board.