LLC enabling statutes authorize two types of management structures. The default structure is member-managed in which all members participate in the management of the company’s business affairs. Member-managed LLCs usually have a relatively small number of members who are actively involved in the company’s business and who owe fiduciary duties.
Then there’s the manager-managed LLC, more akin to a corporation-style management structure and sometimes featuring a Board of Managers and designated officers, in which one or more persons or entities (who may be, but need not be, members of the LLC) are responsible for managing the LLC’s business affairs. Manager-managed LLCs typically have a number (which could be large) of non-managing members who owe no fiduciary duties and essentially serve as passive investors, not unlike limited partners.
The manager-managed LLC offers flexibility and efficiencies not available with a member-managed structure. But, as with any agency relationship, care must be taken in the operating agreement to spell out not only the scope of the managers’ authority, but also the voting requirements and circumstances under which the managers can be removed or replaced by the members.
A California intermediate appellate court’s ruling earlier this month involving a manager-managed LLC, in Hillsborough Development Co., LLC v Annen, illustrates what can go wrong when the operating agreement names one of its members as sole manager but fails to include any provision addressing manager removal.