Manager Managed LLCs

A Limited Liability Company (”LLC”) combines the personal asset protection of a corporation with the taxation advantages of a partnership. LLCs are owned by their members (akin to shareholders) and may be member-managed or manager-managed. In a member-managed LLC, the members manage the company. Our discussion of member-managed LLCs is here.

The portion of the Illinois Business Organizations Act that addresses LLCs and their management is 805 ILCS 180; specifically, the Illinois Limited Liability Company Act (805 ILCS 180/15-1). Section 15-1 addresses “Management of limited liability company,” and states that an LLC is member-managed unless the Articles of Organization or Operating Agreement expressly provides that the LLC will be manager-managed, will be managed by managers, that management of the company is or will be vested in manager, or the Operating Agreement includes similar language.

Management of the LLC is initially vested in members. Managers, unlike corporate directors, are granted authority to act pursuant to the LLC’s Operating Agreement and Articles of Organization. Whereas, the Illinois Business Corporation Act vests all control and management authority in the Board of Directors.

Since LLC managers derive their authority from the Articles of Organization and Operating Agreement, members (unlike corporate shareholders) have a significant role in establishing the LLC’s governing practices. This difference in authority substantially distinguishes LLC members’ rights from corporate stockholders rights.

As a practical matter, however, LLC’s can and do grant managers the same management power and authority as exercised by a corporate board of directors, which thereby can create a management structure essentially the same as a corporation.

Larger LLCs are most likely to be manager-managed, whereas smaller LLCs tend to be member-managed. Most manager-managed LLCs do employ outside parties to manage the company. These managers may or may not be members, also.

A manager-managed LLC is operated by managers selected by the members as a leadership or management team, much like a corporation’s Board of Directors selects a leadership or management team of corporate officers to control and operate daily activities. With a manager-managed LLC, the owner-members control the company generally, through voting on company issues, rather than active daily involvement in company’s operations.

Initial LLC members and organizers determine the number of managers. It is prudent for a manager-managed LLC to have an odd number of managers to avoid ties or management deadlocks.

The LLC’s Operating Agreement should contain information regarding the roles and responsibilities of the managers and their authority, and contain provisions for replacement of LLC managers, voting rights, and the manner in which LLC members select new managers. If the LLC is managed by a manager, any act undertaken by the manager in the normal course of business and within the scope of the manager’s authority will bind the LLC.

Conversely, the LLC is not bound when a third party deals with the manager and knows the manager lacks authority to enter into a certain type of agreement or make a particular kind of decisions that would otherwise bind the LLC.

As to the LLC manager’s relationship to the members, it is as a fiduciary with fiduciary duties to the LLC and the members, and liability for breach of fiduciary duty. The fiduciary duty includes and imposes on LLC manages the duty of care and duty of loyalty.

To avoid conflicts of interest, the duty of loyalty requires the LLC manager always to put the LLC’s interests of ahead of his or her self-interest. Any actual conflict of interest must be disclosed, so it can be addressed and/or waived in an Operating Agreement or by a Members’ Resolution.

The LLC lawyers at Lubin Austermuehle have many years of experience defending and prosecuting claims involving LLC members including breach of fiduciary duty and fraud claims and claims involving the freeze-out of members in the federal and state Chancery courts in Illinois in a wide variety of business dispute lawsuits. We are knowledgeable regarding the changes and complexities of LLC law. We are committed to fighting for our clients’ rights in LLC dispute cases at both the trial and appellate court levels. We have successfully defended or prosecuted LLC cases achieving large settlements for our clients or winning them control of their business. Conveniently located in Chicago and Elmhurst, Illinois, we have successfully litigated business separation, accounting and breach of fiduciary duty cases for clients all over the Chicago area. To schedule a consultation with one of our skilled attorneys, you can contact us online or give us a call at 630-333-0333.