Why Aren’t All LLCs Manager-managed?

This post about manager-managed limited liability companies is based on a Quora question  that I answered. Please see Why are not all LLCs manager-managed?

In this post I will refer to California law. I expect that the law of many, if not all, other states is similar.

Default is Member-managed…

The default is that a limited liability company is member-managed. Corporations Code Section 17704.07(a) states: “A limited liability company is a member-managed limited liability company unless the articles of organization contain the statement required by paragraph (5) of subdivision (b) of Section 17702.01.”

Corporations Code Section 17702.01(b)(5) states: “If the limited liability company is to be manager-managed, the articles of organization shall contain a statement to that effect.”

This default makes sense. LLC formation is supposed to be easy. Member-managed is the easy approach.

But Manager-managed Must Be Allowed

However, manager-managed must be allowed. A given LLC’s members might not have the time, energy, skill, or inclination to manage the LLC’s operations. That is where a non-member manager comes in.

From the legal perspective, the real significance of member-managed vs. manager-managed is who has authority to act as an agent of the LLC.

• Corporations Code Section 17703.01(a) states, in relevant part (emphasis added): “Unless the articles of organization indicate the limited liability company is a manager-managed limited liability company [i.e., if the LLC is member-managed], every member is an agent of the limited liability company for the purpose of its business or affairs, and the act of any member, including, but not limited to, the execution in the name of the limited liability company of any instrument, for the apparent purpose of carrying on in the usual way the business or affairs of the limited liability company of which that person is a member, binds the limited liability company in the particular matter….”
• Corporations Code Section 17703.01(b) states, in relevant part (emphasis added): “If the articles of organization indicate that the limited liability company is a manager-managed limited liability company, each of the following applies: (1) No member acting solely in the capacity of a member is an agent of the limited liability company nor can any member bind or execute any instrument on behalf of the limited liability company. (2) Every manager is an agent of the limited liability company for the purpose of its business or affairs, and the act of any manager, including, but not limited to, the execution in the name of the limited liability company of any instrument for apparently carrying on in the usual way the business or affairs of the limited liability company of which the person is a manager, binds the limited liability company….”

So, by including in the public record (the articles of organization) a statement that an LLC is manager-managed, the LLC is putting others on notice that the manager(s) may act on behalf of the LLC, but the member(s) may not.

And, conversely, by not stating that the LLC is manager-managed, the LLC is putting others on notice that the members may act on behalf of the LLC.

Check out all posts about LLCs.

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
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