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Problems with Decision-Making in an LLC
Although there are many benefits that a Limited Liability Corporation (LLC) entity may provide for your company, there is inherent potential for problems with decision-making. To avoid problems with decision-making in your LLC, it is important to be fully aware of governing laws and how they will affect your business.
How to Avoid Problems with Decision-Making in your LLC
Unlike other business entities, owners of an LLC have almost unlimited discretion to decide the roles of owners and management, specifically regarding decision-making. Owners (usually referred to as “members” in an LLC) may choose to manage the business personally, thereby keeping the decision-making power. However, they may also choose to delegate the decision-making authority to managers, those they select to run the business. In this scenario, the owners typically only vote on major decisions, such as amending the Operating Agreement or Articles of Organization, or admitting a new owner. If there are no specifics in the Articles of Organization, the default prescribed by state law is for the LLC to be member-managed.
Decision-Making problems with a Manager-Managed LLC
Creating Manager-Managed LLC with multiple owners is much like establishing a corporation with the Managers as the Board of Directors and owners as the shareholders. Typically, only major decisions, such as amending the Operating Agreement or Articles of Organization, or admitting a new Owner require votes from the owners. The managers make day-to-day operation decisions. This creates an obvious problem if a member disagrees with the decisions that the managers are making. Unfortunately, in a Manager-Managed LLC, the members usually must file a derivative suit in order to overthrow a decision, similar to shareholders against the board of directors in a corporation.
Decision-Making problems with a Member-Managed LLC
Choosing a Member-Managed LLC may create problems with decision-making as well. In a Member-Managed LLC, each member has equal rights, a majority of the votes wins, and each member is responsible for the day-to-day operations. The default rules give each member equal voting and decision-making rights, irrespective of ownership percentage. You can imagine the problems that may arise when there are multiple owners and major decisions to be made under the default rules. This problem may be avoided by allocating rules about voting and decision-making in the Operating Agreement and Articles of Incorporation.
Solutions to Decision-Making Problems in an LLC
Solutions to avoiding these decision-making problems include defining the decision-making powers and roles carefully in both the Operating Agreement and the Articles of Organization at the creation of the LLC. You may choose to be Member-Managed LLC, you may elect the members as managers, or you may define voting rights and decision-making rights differently. Creating an LLC Operating Agreement specific to your company’s unique needs and circumstances will provide effect long-term protection to your business strategies and results. Our Arizona business attorneys at Gunderson, Denton & Peterson can further ensure that you create your LLC in the way most advantageous to you and your specific goals with the company.
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Mesa, AZ 85213