LLC Board of Directors: Everything You Need To Know
An LLC Board of Directors is not required by law — however, a limited liability company should consider the advantages of having a board of advisors.3 min read
2. Member-Managed vs. Manager-Managed
3. Operating Agreement
Updated November 16, 2020:
An LLC Board of Directors is not required by law — however, a limited liability company should consider the advantages of having a board of advisors that functions the same as a board of directors. A board of directors is a group of people elected to represent stockholders and govern business activities such as establishing company policies for management and making critical business decisions.
Limited Liability Company
A limited liability company is the most popular business structure, recognized in every state, combining characteristics of a partnership and a corporation. An LLC is separate from its owners, which provides liability insurance. The owners of an LLC, called members, are not held personally liable for the company's liabilities or debts. In addition to liability protection, LLCs are popular for their simple business structure, which has fewer bookkeeping and tax filing requirements.
Advantages of an LLC
- Liability protection.
- Easy to form.
- Flexible management style.
- Foreign ownership and tax flexibility.
For federal tax purposes, the IRS considers a limited liability company to be either a partnership, corporation, or an entity disregarded (also called a single-member LLC). To be considered an entity disregarded, the company is owned by only one person. A single-member LLC does not have personal liability protection for its owner; in contrast, they are taxed on company profits.
Unlike corporations, a limited liability company is not required by law to have a board of directors, but are free to do so if they choose. In a corporate structure, stockholders appoint board members, who act as representatives for the stockholders. This kind of management is known as centralized management. It is highly advised that an LLC consider the advantages of having a board of advisors to govern the business and protect its shareholders. Similar to a board of directors, an LLC may have managing members.
Member-Managed vs. Manager-Managed
An LLC is either managed by a single designated manager or board of managers or by its member. An LLC's management style is declared in the company's Certificate of Organization or Articles of Organization. As part of the business formation, this process outlines who will run its day-to-day operations. Both management styles can delegate power and authority to the company's officers.
- Default management style.
- Can consist of one or more of the company's owners.
- Each member has equal rights to management.
- Managed directly by its owners.
- The best option for companies that produce and sell goods or provide services.
- Does not include a Board of Managers.
- A majority of the owners must agree on certain decisions for the issue at hand to be accepted by the company.
- Only the managers, members or nonmembers, have the authority to bind agreements and contracts.
- Managers who are members of the LLC function the same as a member-managed LLC.
- Managers that are not owners of the LLC acquire control of the business and have authority over the owners.
- Responsibility is based on their ownership in the company.
- The Board of Managers governs management.
- Can have one individual or unlimited members.
A manager-managed system is most suitable for:
- Larger companies.
- Investors that do not want to play an active role in the business.
Operating agreements are confidential documents that describe the company's ownership and management style, and members' rights and obligations. An operating agreement is not a mandatory document, except for in two states (New York and Missouri). Though not required, it is highly recommended that an LLC with many owners have an operating agreement in order to avoid conflict or confusion. An operating agreement will:
- Act as proof of authority for investors or government agencies.
- Clearly explain the process in which a manager is replaced.
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