In today’s post, I want to discuss how California Limited Liability Companies (LLC) are managed. If you search through my past posts, you’ll find several posts on topics related to California LLCs, including (1) filing of Statements of Information, and (2) whether California LLCs can have different classes of members.
Like any organization, an LLC requires that someone be in charge. There are two common options.
Member-managed
First, the various members manage the LLC themselves in a democratic manner. They, for instance, might have meetings, vote on what actions the LLC will and will not take, etc. As a reminder, the term “member” simply refers to a person or entity that owns some portion of the LLC. When discussing corporations, the analogous term for “member” would be “shareholder”.
Understandably, many people are not enthusiastic about this idea. They might, for instance, not want to deal with the headache of having meetings. They may also be not want to engage in debates, arguments, or any sort of conflict with other members about why a particular course of action is good, bad, or neutral. Additionally, a member might conclude that the administrative burden of having an LLC is something that should be minimized. Running the business should be the main focus. That is, after all, the whole reason why they formed an LLC in the first place.
Manager-managed
The second option is for the members to, in essence, outsource the management role by, for instance, hiring someone to manage the LLC. The downside of this, of course, is that this manager won’t work for free. This could make hiring an outside manager cost-prohibitive for very small LLCs or LLCs that are just getting started. The upside, however, is that an outside manager is likely to already be very familiar with all of the rules and laws that the LLC has to comply with. To contrast, a person who formed their very first LLC is unlikely to have this same level of familiarity so they’ll experience more of a struggle, get things wrong that the experienced manager would not, etc.
California Default
In California, the default assumption is that an LLC will be managed by its members. In case you’re interested, the relevant law for this is Section 17704.07(a) of the California Corporations Code, which states:
A limited liability company is a member-managed limited liability company unless the articles of organization contain the statement required by paragraph (5) of subdivision (b) of Section 17702.01.
As you can hopefully see, an LLC can opt out of being member-managed by making sure its Articles of Organization contain a statement that the LLC shall be manager-managed instead. The statement is actually very simple. Section 17702.01(b)(5) mentioned above merely states:
If the limited liability company is to be manager-managed, the articles of organization shall contain a statement to that effect.
As you can see, no special wording or language is required. Any unambiguous statement should theoretically suffice.
New York Default
New York law contains this same default assumption. Section 401(a) of New York’s Limited Liability Law which states, in pertinent part:
Unless the articles of organization provides for management of the limited liability company by a manager or managers or a class or classes of managers, management of the limited liability company shall be vested in its members who shall manage the limited liability company in accordance with this chapter, subject to any provisions in the articles of organization or the operating agreement…
If you’re a frequent reader of these posts, you’ll know what comes next so say it with me now:
- I hope this post has been helpful and informative.
- It’s not meant to be a complete or exhaustive explanation of the topics described.
- If you are dealing with a situation involving any of the topics described, please do your own research. I have no way of knowing what the specifics of your situation are and the law is all about the specifics.
- If you are dealing with a situation involving any of the topics described, please do also consider finding a lawyer with whom to discuss your situation. Paying for a consultation for, say, an hour could very well save you from having to re-invent the proverbial wheel and also from potentially making a mistake that will cause more significant problems later on.
Good luck!
Andy Chen
Latest posts by Andy Chen (see all)
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