By:
Tamara Pow, Esq.
Beware of LLC Managers that can’t be removed! As a business attorney,
I work with many LLCs in San Jose and the Bay Area. Some of those have
had to remove their LLC manager for one reason or another. I cannot overemphasize
the importance of having operating agreement provisions in place to remove
and replace a bad Manager.
In a previous blog I discussed the important decision of determining whether
you will have a
manager managed or a member managed LLC. Once you have decided that your LLC will be manager managed, you should
carefully think through the methodologies you want to put in place to
elect and remove a manager.
In some LLCs, the manager is another business entity rather than a person,
usually either another LLC or a corporation. This is often the structure
in real estate development and investment groups where the manager is
an entity controlled by the sponsor. If this is the case, election and
removal provisions are simple – the manager is stated in the operating
agreement and stays as the manager unless a successor is elected by a
vote of the members. This vote is usually a supermajority vote, but the
percentage will depend on what percent of the company the sponsor insiders own.
However, if the manager is an individual, the LLC operating agreement should
consider what happens when the manager resigns, is unable to serve due
to a disability or other circumstances, dies, should be removed for cause,
or when the members simply want someone else to act as manager. How the
operating agreement is drafted for these situations varies greatly based
on who is doing the drafting.
If I am representing the manager, I will want to make sure that she cannot
easily be removed. In that case, the operating agreement will provide
that the manager may only be removed for cause, and such removal requires
a vote of a supermajority of the members which supermajority will include
the manager’s percentage interest as a member.
If I am representing an investor, I want to make sure the manager can be
removed if she is not doing the best job for the company. This could include
having a new election every year, or making removal easier (by less than
a majority, and not for cause), and replacement easier (by a simple majority
of the membership interests).
In a family limited liability company, I will often dictate the initial
successor manager in the operating agreement so that if dad is the manager
and he dies or is unable to serve for any reason, there is clarity as
to who will succeed him – whether that be mom, one of the kids,
or an non-family member.
And all of these decisions get even more complicated if your operating
agreement will have more than one manager. If you have multiple managers
in one LLC, make sure you also consider whether certain groups of investors
can elect a manager to represent their interests, or if all managers are
elected the same way. And once they are elected, how will multiple managers
make decisions? Do they all have to agree? Does a majority in the number
of managers rule? These decisions lead to the next topic to consider when
forming a manager managed LLC – what will the duties and powers
of the manager(s) be? I will discuss powers of LLC managers in my next
blog. Don’t assume the answers that are right for you can be found
in a form document.
Tamara B. Pow is a founding partner of Strategy Law, LLP in downtown San
Jose, California where she practices business and real estate law including
formations, operations, transfers, conversions and dissolutions of LLCs
and other business entities. Her personal experience investing in real
estate limited liability companies (both family LLCs and investment LLCs)
as well as her MBA and real estate brokers license help her in advising
owners of limited liability companies and other business entities.
The information appearing in this blog does not constitute legal advice
or opinion. Such advice and opinions are provided by the firm only upon
engagement with respect to specific factual situations. Specific questions
relating to this article should be addressed directly to Strategy Law, LLP.