Why We Don’t Recommend Member-Managed LLCs
In many states, the “default” setting for limited liability companies is that they will be member-managed—that is, unless the members specify otherwise in the company’s articles of organization or operating agreement (depending on the relevant state law), the members will all be the managers of the LLC. That is the case in California, Delaware, and New York, for example. However, we are not fans of the default setting and we do not recommend member-managed LLCs for a simple, practical reason: it is much easier to change a manager or managers when the company’s operating agreement provides the infrastructure for a manager-managed LLC.
If the members forming a limited liability company do not opt out, then they will all be managers of a member-managed company. But at some point, a member may wish to give up managerial responsibility without disassociating as a member, or the members as a whole may decide that the business is better off being managed by one or more but less than all of the members or by an outside (non-member) manager. In that case, the members will have to go through the time, hassle, and expense of filing amended or restated articles of organization (in California and New York, to provide for a manager-managed company) and/or an amended or restated operating agreement (in Delaware, to provide for a manager-managed company, and in all three states to provide the procedures for appointing and removing a manager).
Instead, we prefer to set the LLC up as a manager-managed company from the get-go. Even though some states (like California and New York, but not Delaware) provide default rules for appointing and removing managers, it makes sense in every state to include provisions in the company’s operating agreement regarding managers, including as to their appointment and removal or replacement. That way, the company has a clear idea of the procedure involved and does not have to reinvent the wheel if and when a change in management is desired. In Delaware, there is an added benefit to including nuts-and-bolts provisions about managers in the company’s operating agreement, which is that an extra provision can be included to ensure that a member who is not a manager does not have the authority to bind the company despite not being a manager of what is explicitly a manager-managed LLC.
In sum, it just makes good practical sense to form all limited liability companies as manager-managed companies, even in those instances where the company will initially be managed by all of its members. If the members later desire to change the management structure, it will be much easier to do if the company was set up as a manager-managed company.
See Cal. Corp. Code §§ 17702.01(b)(5), 17704.07 (a limited liability company is a member-managed company unless the articles of organization contain a statement to the effect that the company is to be manager-managed); Del. Code Ann. tit. 6, § 18-402 (unless otherwise provided in a limited liability company agreement, the management of the company shall be vested in its members in proportion to their ownership interests); N.Y. Ltd. Liab. Co. Law §§ 401(a), 408(a) (the management of the company is vested in its members unless the articles of organization provide otherwise).
See Cal. Corp. Code § 17702.02 (amendment or restatement of articles of organization); N.Y. Ltd. Liab. Co. Law §§ 211 (amendment of articles of organization); 214 (restated articles of organization).
See Del. Code Ann. tit. 6, §§ 18-101(12), 18-401 (a person may be named as a manager of a limited liability company in, or (preferably) designated as a manager pursuant to, the limited liability company agreement).
Compare Cal. Corp. Code § 17704.07(c)(5) (default rules for choosing and removing a manager) and N.Y. Ltd. Liab. Co. Law §§ 413 (election and term of managers), 414 (removal or replacement of managers) with Del. Code Ann. tit. 6, § 18-402 (in a manager-managed company, the manager “shall be chosen in the manner provided in the limited liability company agreement”).
See Del. Code Ann. tit. 6, § 18-402 (“Unless otherwise provided in a limited liability company agreement, each member and manager has the authority to bind the limited liability company.”). In California and New York, by contrast, the default rule is that in a manager-managed company, members who are not managers do not have the authority to bind the company. See Cal. Corp. Code § 17703.01(b)(1) (“If the articles of organization indicate that the limited liability company is a manager-managed limited liability company, … [n]o member acting solely in the capacity of a member is an agent of the limited liability company nor can any member bind or execute any instrument on behalf of the limited liability company.”); N.Y. Ltd. Liab. Co. Law § 412(b)(1) (“If the articles of organization of a limited liability company provide that management shall be vested in one or more managers[,] … no member, solely by reason of being a member, is an agent of the limited liability company for the purpose of its business except to the extent that authority has been delegated to such member by the manager or managers or by the provisions of the operating agreement.”).