Key Takeaways

  • A business management agreement defines the scope of authority, responsibilities, compensation, and obligations between an LLC and its appointed manager.
  • Manager-managed LLCs rely on this agreement to clearly outline decision-making powers, financial oversight, and operational duties.
  • Comprehensive agreements reduce disputes, protect the business’s interests, and ensure compliance with state laws.
  • Including provisions on compensation, termination, liability, confidentiality, and dispute resolution can safeguard both the company and the manager.
  • A well-drafted management agreement complements your operating agreement and strengthens the LLC’s governance structure.

An LLC management agreement is needed when an LLC opts to appoint a manager to run the day-to-day business operations. An LLC is a business organization structure that is regulated by local state laws and becomes active once the proper documentation is filed. 

As its name might suggest, personal liability of members is limited in regards to the company's debts and financial obligations. Owners of an LLC are called members, and they can be a natural person or a corporation. Members must have contributed some sort of capital like money, property, or services, in exchange for an ownership percentage. Members' interests differ from shares in a corporation. This is a percentage of ownership based on their individual contribution. 

Members can organize the LLC how they see fit, with almost total freedom to create an individualized relationship between members, as well as setting forth the terms that govern the operation and maintenance of the LLC. 

Types of LLCs

LLCs can be owned by a single person (single-member LLCs) or by two or more owners (multiple-member LLCs). Creating a single-member LLC operating agreement is more simple than one for multiple members. Single-member LLCs can opt to be taxed as a sole proprietorship and multiple-member LLCs can opt for partnership tax status. With multiple-member LLCs, you have the option to set it up so that all members have the authority to be involved in day-to-day operations, which is called member-managed. Or, you can appoint a manager or management committee, which is known as a manager-managed LLC. 

Why a Business Management Agreement Matters

When an LLC chooses a manager-managed structure, creating a detailed business management agreement is critical. This agreement is a legally binding contract that establishes the relationship between the LLC’s members and the appointed manager or management team. It goes beyond day-to-day operations by defining the scope of authority, duties, compensation structure, and decision-making power delegated to the manager.

A well-drafted business management agreement serves several essential purposes:

  • Clarifies Roles and Responsibilities: It removes ambiguity by outlining the manager’s obligations, including operational oversight, strategic planning, budgeting, and compliance.
  • Reduces Conflict: By defining how decisions are made and how disagreements will be resolved, it minimizes the risk of internal disputes.
  • Protects the Business: Clear performance expectations and termination conditions protect the company from managerial misconduct or negligence.
  • Supports Long-Term Stability: With transparent terms, the LLC can transition smoothly if a manager departs or is replaced.

Because every LLC operates differently, this agreement should be tailored to the company’s industry, size, and internal governance model.

Operating Agreements 

After creating the LLC, the next step is usually making the LLC Operating Agreement. It's not necessarily required under state LLC laws, but having an LLC Operating Agreement is highly recommended. This is a legal document that covers rules and obligations of your LLC. The Articles of Organization do not cover this. 

The Operating Agreement shows who owns the company, how profits are to be dealt with, and spells out steps on how any problems will be handled. It can cover specific scenarios and be as detailed as the members think is important. It's a really important document for multiple member LLCs as it can reduce conflicts and costly litigation fees resolving disputes. 

The agreement is similar to corporate bylaws. They tend to be long and have a lot of detailed information. It's recommended to obtain legal assistance with this step. While it can be oral or written, it's recommended you put it all in writing. This cements the steps discussed and eliminates confusion if a dispute or conflict arises down the line. And, with multiple members, it's almost certain there will be disagreements or disputes down the line at least once. 

The Operating Agreement can also provide details about how internal management will be handled, including how decisions are made, what is the process to add a new member, and when the LLC will hold regular meetings. Details will vary based on a variety of factors that are specific to the particular LLC — things like the number of members, how the management will be handled, investment amounts, profit sharing, and tax considerations. 

You may hear an LLC Operating Agreement referred to as LLC Bylaws or a Limited Liability Company Operating Agreement. While an Operating Agreement might not be required, states do require LLCs to file Articles of Organization, which does include some basic business information. 

Essential Clauses to Include in a Business Management Agreement

A business management agreement should be customized to your company’s unique needs, but several provisions are considered fundamental to protect both the business and the manager. These include:

  1. Scope of Authority: Define the specific powers granted to the manager — such as signing contracts, hiring staff, overseeing finances, or approving budgets. This ensures that the manager acts within defined limits.
  2. Duties and Responsibilities: Outline day-to-day tasks, reporting requirements, and key performance indicators. This section should also address the manager’s fiduciary duties to the company.
  3. Compensation and Expenses: Detail how the manager will be compensated (e.g., salary, performance bonuses, profit-sharing) and which business expenses are reimbursable.
  4. Term and Termination: Specify the agreement’s duration, renewal process, and conditions for early termination, including breach of duty or poor performance.
  5. Liability and Indemnification: Clarify whether the manager is personally liable for decisions and whether the LLC will indemnify them against third-party claims arising from their actions.
  6. Confidentiality and Non-Compete: Protect the LLC’s proprietary information and prevent the manager from competing with the company during or after their term.
  7. Dispute Resolution: Establish how disputes will be handled, such as through mediation, arbitration, or litigation, to avoid costly legal battles.

Including these clauses not only sets expectations but also reduces the risk of legal complications and strengthens the LLC’s internal governance framework.

Benefits of an LLC Operating Agreement

Even where an LLC Operating Agreement is not required, there are some additional benefits that should sway you into drafting one. These include:        

  • It allows you to control your business rather than needing to follow the default LLC state laws.          
  • They protect the limited liability aspect of the company, as there may be concerns about operating as a sole proprietorship or partnership, which could open you to liability.            
  • It obviously minimizes the chance of disputes and costly litigation if business arrangements are clearly spelled out in the agreement. 

The agreement is also a great tool for reference down the line because it can talk about what to do if a member decides to withdraw, the LLC is dissolving, or you need to admit a new member. 

Best Practices for Drafting a Business Management Agreement

Drafting a business management agreement requires careful consideration of your company’s goals, operational needs, and state legal requirements. Here are some best practices to follow:

  • Align with the Operating Agreement: Ensure the management agreement complements — and does not conflict with — the LLC’s operating agreement.
  • Use Clear and Specific Language: Ambiguities can lead to disputes. Spell out each party’s rights and obligations with precise terms.
  • Plan for Change: Include provisions addressing succession, resignation, or removal of the manager, as well as how new managers will be appointed.
  • Consider Future Growth: Anticipate how the manager’s responsibilities might evolve as the company expands and update the agreement accordingly.
  • Seek Legal Review: Because state laws vary and each business has unique considerations, have an attorney review the agreement before signing.

Taking a strategic approach to drafting this contract helps ensure the LLC’s leadership structure is robust and adaptable, paving the way for long-term success.

Frequently Asked Questions

  1. What is a business management agreement for an LLC?
    It’s a legally binding contract outlining the roles, powers, duties, and compensation of a manager appointed to oversee an LLC’s daily operations.
  2. Is a business management agreement required by law?
    Not always, but it’s highly recommended for manager-managed LLCs to prevent disputes, define authority, and protect both the business and the manager.
  3. How is a business management agreement different from an operating agreement?
    The operating agreement governs the LLC as a whole, while the business management agreement focuses specifically on the manager’s relationship with the company.
  4. Can members still make decisions if a manager is appointed?
    Yes, but their powers are typically limited to major business decisions defined in the operating agreement or the management agreement.
  5. Should I hire an attorney to draft the agreement?
    Yes. Because state laws and business needs vary, legal counsel can help ensure the agreement is enforceable and aligns with your company’s objectives.

If you have questions regarding an LLC management agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.