Who Controls LLC Decision-making?

 Under the laws of Ohio and most other states, the management of an LLC may be vested in its Members, or may be vested in Managers, as set forth in the LLC’s Operating Agreement.  The Operating Agreement may appoint one or more Managers to make all or some of the decisions affecting the LLC.  Or the Operating Agreement may provide that all decisions are made by the Members based on their respective percentage ownership interests, positive capital account balances or contributions to capital, or by the Members on a per capita basis (one vote per member), or other methodology to which the Members agree.  If there is no Operating Agreement, or if the Operating Agreement is silent as to management of the LLC, then all decision-making is vested in the Members based on their relative capital contributions to the LLC.

To avoid uncertainty regarding LLC decision-making, it is advisable to describe in detail how LLC decisions are to be made.  In many situations it makes sense to create a management hierarchy where different types of decisions require different levels of consent or approval by Managers or Members.  For example, a Manager could be appointed to handle the day-to-day business decisions, but the approval of a majority in interest of the Members could be required to appoint the Manager, or make other higher level decisions such as entering a long term lease, buying or selling significant assets or making expenditures over a specified dollar amount.  In addition, if appropriate, a super-majority of the Members (2/3rds or 3/4th) could be required to approve extraordinary events and transactions such as dissolution, merger or sale of the business.

If a Manager is appointed, it is important to describe who the successor Manager will be, or how the replacement Manager will be selected, upon the termination or resignation of the current Manager.  If you need some help drafting or interpreting your Operating Agreement, we can help.  Call or email me at.   Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  The Ohio statute contains many default rules for governing a LLC.  As noted above these defaults can be changed as necessary or desirable in the Operating Agreement.  But the Ohio statute also contains many default rules affecting corporations.  For example, under the Ohio statute, no person can serve as both President and Secretary of a corporation, and a corporation by statute must have at least as many directors and Shareholders up to three.  In single owner corporations and certain other situations, these default rules can be inconvenient.  Ohio law provides that any or all of these default rules may be changed if the Shareholders sign a Close Corporation Agreement.  Let me know if you want to know more about Close Corporation Agreements and how they can be used to help you structure the management and governance process of your corporation.  Call or email me at Jsenney@pselaw.com or 937-223-1130.

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