What Should LLC Managers Get Paid?

By: Tamara B. Pow, Esq.

A question I am frequently asked by LLC owners how LLC managers should get paid? A limited liability company operating agreement should clearly outline payments to both Managers and their affiliates, since these payments are typically made before a determination of whether cash is available for distribution to members.

If you are establishing or investing in a manager managed LLC, the operating agreement should specify how to elect and remove managers , and what powers those managers will have . The agreement should clearly state what fees will be paid to the managers by the company, both for performing their duties as managers and for other transactions between a manager and the company. If a manager will be paid a salary then market rates for those services should be considered, and the terms of employment should be set out in an employment agreement. If the manager will be paid special fees for performing certain duties that are outside of the normal day to day operations, those fees, in addition to the salary, should be approved by the members in advance by inclusion in the company’s operating agreement.

Here are some special fees often seen in real estate LLCs:

Acquisition Fee/Sale Fee: a fee for purchasing or selling an asset, usually based on a percentage of the purchase price of real estate and paid at the closing, often tied to market rates for outside brokers.

Asset Management Fee: an annual fee for managing the invested equity, usually a percentage of funds invested in the company.

Property Management Fee: a fee for acting as property manager, usually a percentage of gross rents, often tied to market rates for outside property management companies.

Construction Management Fee: a fee for managing major construction projects, usually based on the cost of construction.

Development Management Fee: a fee for managing development of a new project, usually based on costs of development.

Financing/Refinancing Fee: a fee for managing a financing of a project, often tied to market rates for third party brokers.

The operating agreement should also have some blanket provisions providing that the company will (or will not) reimburse the managers for their expenses in running the company, and for providing any services that are outside of the scope of a manager’s duties. For example, if a manager also happens to be a lawyer and chooses to draft contracts or represent the company in a litigation matter, the manager should be paid at market rates for those services if they are not an expected part of her duties. If details like this are considered in advance and provided for in the operating agreement, it is less likely a dispute will arise once operations are underway. This is particularly true when monetary payments are at issue.

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 representing real estate LLCs and other business entities. Her personal experience managing and investing in real estate limited liability companies 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.

Consider Carefully the Powers Granted to LLC Managers!

By: Tamara B. Pow, Esq.

When starting an LLC, carefully consider the powers granted to an LLC manager. Your operating agreement should have customized provisions regarding what the manager(s) can and cannot do – do not just accept some form language. As an LLC attorney, I encourage my clients to carefully consider the powers that their LLC managers should, and should not, have.

Once you have determined whether your limited liability company will be manager managed and you have procedures in place for how you will elect and remove a manager , you need to carefully consider what powers you will give the manager(s) and what limitations you will set on those powers. The business of the LLC is critical to determining what you need to put in your operating agreement. For example, in a real estate investment LLC, make sure the manager has the specific rights to sign deeds and loan documents without going to a vote of the members.

The list of potential powers (and limitations on powers) of the managers is endless, but here are some items to consider:

  • Day to day operations authority
  • Entering into contracts (up to a certain dollar amount?)
  • Opening bank accounts, designating signing authority
  • Paying debts, signing checks
  • Hiring professionals like lawyers and accountants
  • Obtaining insurance at the expense of the company
  • Borrowing funds, refinancing debt
  • Investing company funds
  • Requesting capital from Members
  • Bringing or defending lawsuits
  • Determining cash available for distributions
  • Selling assets of the Company
  • Purchasing major assets
  • Accepting additional Members
  • Approving transfers of membership interests
  • Creating new classes of membership interests
  • Appointing officers, delegating authority
  • Signing tax returns and dealing with tax audits
  • Transacting business with the company, individually or through affiliates
  • Competing with the company’s business or maintaining other employment

If the managers are supposed to be actively participating in the business, rather than simply managing an investment, the LLC agreement should be careful to not only list the powers the manager has, but also the duties and responsibilities that the manager must perform. Make sure you consider the business of your LLC carefully and consider your expectations for the manager position. And once you know what the expectations are for the manager, you need to consider how they should be paid for fulfilling these expectations and include those provisions in your LLC operating agreement as well.

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 acting as a manager in real estate limited liability companies 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.

Electing and Removing LLC Managers – What You Need to Know

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.

Corporation Alert! New Statement of Information Forms

By: Tamara Pow, Esq.

The California Secretary of State has updated business entity forms yet again this year. In July I wrote a blog referencing the changes to certain LLC forms including the Articles of Organization, Certificate of Dissolution, Certificate of Cancellation and the Short Form Certificate of Cancellation. The Secretary of State is at it again and has revised certain forms for foreign and domestic corporations.

Effective immediately, the California Secretary of State has the following new forms:

  1. Statement of Information (Domestic and Foreign Corporations);
  2. Attachment to the Statement of Information;
  3. Statement of Information (No Change); and
  4. Statement of Information (Non-Profit Corporations).

As part of this change there is now one form of Statement of Information to be used for both domestic and foreign corporations, instead of separate forms for each type of entity.

Many companies file their Statement of Information forms on their own. If you are filing your own Statement of Information, you must use the new form or the Secretary of State will reject your filing. Filings that are rejected by the Secretary of State waste time, money and if not corrected can result in late filing fees and ultimately suspension of your entity if not resolved.

Statements of Information for corporations can generally be filed online using E-file on the Secretary of State’s website. This will ensure that the correct form is being completed. However, if you must mail in your Statement of Information, be sure that you have checked the Secretary of State’s website at http://www.sos.ca.gov/business-programs/business-entities/forms#corp to ensure that you are using the current form. Either way, don’t forget to file on time. It is critical to keep your business entities up to date to maintain your liability shield.

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 corporate formations, operations, maintenance (including filing Statement of Information) and dissolutions. Her consistent and extensive work with business entities keeps her up to date when advising business owners of Secretary of State updates and other changes in the legal requirements of maintaining business entity liability protection.

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.

Bob Hawn presenting to the Internet & Privacy Law Committee on November 8th

Bob Hawn will be presenting a seminar on Website Terms of Use and Contract Formation to the State Bar of California’s Internet and Privacy Law Committe on November 8th.

Should your LLC be Member Managed or Manager Managed? Don’t take this critical decision lightly.

By: Tamara Pow, Esq.

One of the first decisions you have to make when you decide to form a limited liability company is whether the company will be managed by the members or by one or more managers. This decision is so important, it is one of the very few items of information the California Secretary of State requires on the Articles of Organization – the basic document that is filed in order to create your LLC. The Articles require that you state if the LLC will be managed by one manager, more than one manager, or by all of the LLC members.

Unless the Articles say the company is manager managed, the business of the LLC will be managed by all of the members. So, unless the Articles of Organization or the Operating Agreement specifically state that the company is manager managed, every member is an agent of the company and may act on its behalf, and such act will bind the LLC unless the member has no such authority and the person that member is dealing with has actual knowledge that the member has no authority. In other words, unless you want each member to be able to bind the company in its business or affairs, you should mark one of the boxes for manager managed on your Articles of Organization and specifically include manager authority provisions in your LLC’s operating agreement.

I recommend you always clearly call the managers of the company “Managers” whether or not they are also members. I dislike the term “Managing Member” because it is unclear without reading the operating agreement of the company whether a Managing Member is just one of many members in a member managed limited liability company, or whether the Managing Member is a Manager that also happens to be a member (but possibly has more authority than other members if they are not also managers). “Manager” and “Member” are much clearer terms that provide more information to third parties dealing with the LLC.

Once you have decided whether your LLC will be manager managed or member managed, you need to take it a step further and decide how many managers you want and how they will make decisions. You could choose to appoint or elect a number of managers to be on a board of managers, like the board of directors of a corporation. Or, you could choose one person to be the sole manager. Then you can think about whether the Managers, or their appointees, should have authority over different areas of management like officers in a corporation. You can even name Managers, or others, to officer positions in the company’s operating agreement.

Now that you have decided that your LLC will be manager managed, and how many managers you will have, there are many other considerations that should be thought out and included in your operating agreement, including methodologies to elect and remove managers, powers of managers (and limitations on those powers), deadlock provisions if you have an even number of managers, fees paid to managers by the company, and other transactions between a manager and the company.

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 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.

Online Agreements: Size Matters!

By: Robert Hawn, Esq.

I recently had the opportunity to speak on a panel at the State Bar of California Annual Meeting to discuss doing business online. As a technology lawyer practicing in the San Francisco Bay Area, I constantly advise clients on their online activities. One of the most common issues is creating terms of use, or terms of service, that are enforceable.

Many of us engage in day to day business online. Everything from ordering a shirt to buying the latest pop release are performed from our desktop, pad, or phone. As part of this, we often enter into agreements, often called terms of use, terms of service, or just licenses, which govern our activities. People like me want to make sure that these online agreements can be enforced.

For a long time, the court wrestled with the notion that providing sufficient notice of the terms under which someone could use a website would result in an enforceable agreement. So, if you want to make your online agreements are enforceable, you have to make sure you provide enough notice to make sure that someone knows they are entering into an agreement. Sounds simple, right?

Unfortunately, it’s not. Where trouble often occurs is in making sure the user knows they are entering into an agreement. The challenge faced in creating enforceable agreements lies not in the words that are used in the agreement, but, in many cases, the manner in which the user becomes aware of the agreement. This makes enforceability not necessarily a legal problem, but a website design problem. And this problem becomes even more acute when you are dealing with the reduced display of your average cell phone.

Two recent cases, each decided in July of this year and each dealing with the Uber ride service, illustrate the problem. In Cullinane v. Uber Techs., a Massachusetts court had to decide the enforceability of an online agreement to determine if a dispute had to be decided through arbitration. The court describes the account creation process as follows:

“below the credit card information input box, and above the keyboard, appear the words “By creating an Uber account, you agree to the Terms of Service and Privacy Policy”. . . . If a user clicks the button that says “Terms of Service & Privacy Policy”, the Terms of Service then in effect are displayed on the phone.”

In looking at the enforceability issue, the court went back to contracting basics: notice and consent. First, the court held that users were on notice. The language clearly says that “By creating an Uber account, you agree.” Second, the court held that, by clicking on the button, the users manifested intent.

By contrast is Meyer v. Kalanick, a New York case applying California law that was decided less than three weeks later. Same issue as in Cullinane, but different result. Why? Well, remember what I said about notice being important? Let’s look at the contracting process. On the screen where a user keyed in their credit card information, there was a “Register” button in the form of a banner spanning the entire screen. Underneath, in a size similar to the Register button, were buttons enabling payment by PayPal or Apple Wallet. The court goes on to say:

“Beneath these two buttons, in considerably smaller font, are the words “By creating a User account you agree to the “Terms of Service & Privacy Policy” …. “While the Terms of Service & Privacy Policy is in all caps, the key words “By creating a User account you agree to” are not in any way highlighted and, indeed, are barely legible…. A potential user may click on the Register button and complete the User registration process without clicking on the hyperlink.”

The court basically said because the notification of user account creation was “not in any way highlighted” and “barely legible”, the user was not put on notice they were entering into an agreement. Same language as the Cullinane case, but different result. The takeaway: Size Matters!

There are a number of other factors that lead to enforceability. Recent cases show, however, that the design of the contracting process is critical toward making online contracts enforceable.

Bob Hawn is a founding partner of Strategy Law, LLP in downtown San Jose, California. His practice focuses on emerging growth technology companies, technology licensing, angel and venture capital financing, business entity formation, corporate governance, mergers and acquisitions, and U.S. market entry. He speaks regularly on technology law related issues and was the 2014-15 Chair of the Business Law Section of the State Bar of California.

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.

California Conforms to New Tax Due Dates – Update your Agreements!

By: Tamara B. Pow, Esq.

On December 8, 2015 I published a blog about new federal partnership tax return filing deadlines . At that time, the IRS had just announced that partnership and S corporation returns will be due 2 ½ months after year end, or on March 15 th if the partnership is on the calendar tax year. C corporation returns will be due 3 ½ months after year end, or on April 15 th for calendar year corporations. California has now conformed to these due dates (AB 1775, Ch. 16-348). (Note: California has not conformed to the federal delay in changing the due date for C corporations with fiscal years ending on June 30 th .)

Federal extensions (based on requests) of time to file partnership returns have changed – from five months to six months, same as S corporations. C corporation extensions depend on the taxable year, with some being reduced from six months to five months. California (automatic) extensions of time to file may change as well from the current six months for partnerships and seven months for corporations to six months for both ( Spidell’s California Taxletter, Volume 38.10, p.4).

Don’t forget to update LLC operating agreements and LP and LLP partnership agreements, as well as corporate shareholder agreements if necessary to make sure the requirements are in line with these new deadlines. Often these agreements have particular time periods for management to provide tax reporting documents to owners, which may need to be changed. For example, the partnership tax return deadline for a calendar year partnership is now March 15 th . If your partnership agreement still says the managing partner shall prepare tax information by the 90 th day of the tax year, it should be changed to the 60 th day (or thereabouts) to meet the new requirements.

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 limited liability company and other business entity formations, operations, transfers, conversions and dissolutions. Her tax background, including time as a tax consultant at Price Waterhouse, LLP, as well as her MBA and real estate brokers license help her stay apprised of these items when advising owners of LLCs 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.

LLC Operating Agreements – Failure to Contribute, Part II

By: Tamara B. Pow, Esq.

What do you do if your LLC needs capital and a Member fails to contribute their share?

The question of “What if the Company needs more money?” was addressed in Part I of this blog . If it is at all possible that the LLC will need additional funds in the future, the operating agreement should provide both for the right to borrow on prescribed terms from insiders, and the right to require members to contribute their share of the additional capital needed. This Part II addresses potential provisions to include in your LLC operating agreement to deal with the situation where the members are required to contribute additional capital and a member defaults in this obligation. The operating agreement can provide that either the managers or the non-defaulting members may elect one or more of the following remedies:

Advance the Funds for the Defaulting Member

The non-defaulting members may advance funds to the Company to cover those amounts which the defaulting member failed to contribute and then treat that sum as a loan to the defaulting member at a high interest rate (such as 10% per annum). The terms of the advance could include a mechanism for all cash distributions from the LLC that would normally go to the defaulting member to be paid to the advancing member instead until the advance, including interest, is paid in full. It is a good idea to include a form of promissory note as an attachment to your operating agreement if you plan to include this remedy. You may also want to provide that the defaulting member automatically grants a security interest in his or her membership interest to secure the promissory note.

Adjust Percentage Interests

Another alternative may be to simply adjust the percentage interests of the members after the additional capital contributions are made so that the defaulting member is diluted by the additional capital contributions of the other members. If you plan to use this remedy, your operating agreement should provide a formula or other methodology for adjusting the percentage interests so that an appraisal is not required.

Dissolve the Company

This may be considered the nuclear option. If a member does not contribute additional capital when required, the other members may simply not want to continue doing business with the defaulting member and can choose to dissolve the Company. This could be decided by a majority of the non-defaulting Members (or a supermajority, but not less than a majority of the LLC members), or by all of the non-defaulting Members. The method for dissolution should be set forth in the operating agreement.

Buy Out the Defaulting Member

The operating agreement can provide a right in favor of either the Company or the non-defaulting members to buy out the defaulting member’s membership interest. Terms and conditions should be set forth in the agreement. Because this is supposed to be a penalty for the defaulting member’s failure to contribute funds when needed, the purchase price could be less than fair market value as long as the discount is agreed to in advance (by inclusion in the operating agreement).

Preferred Distributions to Non-Defaulting Members

The operating agreement could include a provision giving non-defaulting members preferential distributions in the amount of their additional capital contributions plus a preferred return thereon so that the non-defaulting members get all of their additional contributions back plus more before the defaulting member gets any distribution.

Loss of Rights

A defaulting member could lose her voting and approval rights, either permanently or until the default is cured. A defaulting member could also lose her ability to participate in management or operations, as applicable, either permanently or until the default is cured.

There could be many other potential remedies depending on the type of business of the LLC. For instance, if the additional contribution required is actually for certain property or services by the member, the Company could choose to require the defaulting member to contribute cash equal to the fair market value of the property or services not contributed. Or the Company could simply require specific performance.

Regardless of which remedies are right for a particular LLC, it is critical that the options for enforcement be included in the operating agreement so that each member acknowledges and agrees that the remedies are fair and reasonable at the time the operating agreement is signed, well in advance of any default.

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 limited liability company and other business entity formations, operations, transfers, conversions and dissolutions. Her tax background, including time as a tax consultant at Price Waterhouse, LLP, as well as her MBA and real estate brokers license help her spot issues like these when advising owners of LLCs 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.

Strategy Law is sponsoring C2SV

Strategy Law is proud to be a sponsor of Creative Convergence Silicon Valley (C2SV) , a cutting edge conference bringing together business disrupters and technology luminaries along with established and emerging musical artists for two days of forward looking discussions and three nights of music and parties. C2SV is taking place this weekend (October 6-8) in Downtown San Jose.