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.