In today's Freedom Friday blog and email newsletter, I want to talk about a topic that comes up more often than you might think, although not directly. I get asked to review a lot of LLC operating agreements, and especially for a single-member LLC (or for that matter an LLC operating agreement created for just two members), I see a lot of stuff that isn't necessary. One of those things that isn't necessary, especially in a single-member LLC operating agreement, is a board of directors. So, in today's Freedom Friday blog and email newsletter, I'm answering the question, “Does my LLC need a board of directors?”
If you're a single-member LLC, the short answer is no, you do not need to have a board of directors (or any one of related matters that are unnecessary), and even in a two-member LLC, a board of directors is usually unnecessary. However, if you have a multi-member LLC, with a lot of members, and a manager-managed LLC, you can have a board of directors, if you really want to, but again, it may not be necessary, although it's ultimately up to you, the small business owner.
So, that answer may be confusing, so I'm going to back up, and explain some issues on a higher level. A limited liability company (LLC) in Oklahoma is filed by filing articles of organization with the Oklahoma Secretary of State. The owners of an LLC are called members, not shareholders as they would be in a corporation. LLCs provide the same liability shielding as a corporation, exist perpetually or can designate a time for dissolution, and provide flexibility in operation and administration as in a partnership. An LLC operating agreement should be created (preferably by an attorney) and signed by all the member(s) of the LLC. Like the bylaws of a corporation, an LLC operating agreement governs the company's operations, the relationship between the members, and helps define the duties and expectations of the members to each other and the LLC itself, especially if it is a member-managed LLC.
An LLC operating agreement can be flexible enough to allow a variety of structures and management schemes. Therefore, if they so desire, LLC members can structure their LLC similar to a corporation and designate a board of directors. However, in order for this to happen, the LLC members must first agree that the LLC is to be a manager-managed LLC and not a member-managed LLC. In a member-managed LLC, the member(s), regardless of the number of members, make all the decisions of the business. Typically, if there is more than one LLC member, the members have to meet and vote to make important decisions. The larger the number of LLC members, the more difficult it is to manage a member-managed LLC. This is why an LLC can be a manager-managed LLC. In a manager-managed LLC, the LLC is operated by a designated manager or managers. In a smaller multi-member LLC, sometimes it is best to just have a point person, who is an appointed manager, to run the company. That person can be a member of the LLC, or a non-member (in which case the non-member manager is usually paid or provided with a compensation package). If the manager-managed LLC has more than one manager, then that opens the door to a possible board of directors who would manage the business.
If an LLC is managed by a board of directors, it will have the formal management structure of a corporation but retain the desired characteristics of an LLC, such as ease of formation, better asset protection than a general partnership, and overall flexibility in taxes. You can also streamline management by creating more defined roles for each of the directors. However, this type of management structure also opens the door to fiduciary duties of the members and/or managers of the LLC. Under Oklahoma law, unless the LLC operating agreement specifies otherwise, the LLC members usually do not owe a fiduciary duty to each other or the LLC itself. However, if one of the LLC members is going to serve as a manager in a multi-member LLC, or the LLC will be managed by a board of directors, then the managers (directors) should have fiduciary duties as specified in the LLC operating agreement. Otherwise, you don't need fiduciary duties, just like you don't need a board of directors for your LLC.
Again, you can make your LLC as complex as you want, and have it managed by a board of directors, if all the LLC members agree and desire that. However, in most small LLCs, a board of directors might not be necessary.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
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