A limited liability company or LLC does not need a board of directors, but it can have one if the operating agreement sets up the management structure as a board. Having a board of directors can add formality to a business structure that is still relatively new, and provide a familiarity for others not well-versed in LLCs.
Putting a board of directors in place can also ensure that members meet and discuss relevant issues at various intervals such as an annual meeting. Enforcing a meeting encourages more dialog and reduces the potential for business disputes.
OVERVIEW OF A LIMITED LIABILITY COMPANY
A limited liability company, LLC, is formed by filing articles of organization with the secretary of state of the state in which it will conduct most of its business. All the owners are called members; they are not termed shareholders as they would in a corporation.
LLCs function as a hybrid of corporations and partnerships.
- Provides the liability shielding of a corporation
- LLC can exist in perpetuity or designate a time or event for dissolution like a corporation
- Provides flexibility in operation and administration like a partnership
We highly recommend an operating agreement be created and signed by the membership for any multi-member LLC. An operating agreement governs the operation of the company and the relationship between members, a formalization that helps define duties and expectations.
HOW AN LLC CAN HAVE A BOARD OF DIRECTORS
All businesses are legally treated as “persons” according to the contract creating them, whether they are corporations or LLCs. An LLC’s operating agreement has the flexibility to allow a variety of structures and management schemes. LLC members can, therefore, be structured similarly to a corporation and designate a board of directors.
However, the LLC must be set up as a manager-managed LLC, not a member-managed LLC. The manager can be a member or non-member of the LLC, but if a non-member is tapped for the board, you will need to provide an incentive to participate.
An LLC managed by a board of directors has the formal management structure of a corporation by retains the desired characteristics of an LLC:
- Ease of formation
- Better asset protection than a partnership
- Overall flexibility in taxes and foreign ownership
In formalizing the management structure, you can streamline management by creating more defined roles for the directors. Most LLCs have members with different levels or types of business knowledge. You can create a directorship that fits with a particular member’s abilities while formalizing the various roles.
STRUCTURING THE LLC’S BOARD OF DIRECTORS
Some states require board managed LLCs to perform activities typically required of corporation boards:
- They must hold periodic meetings
- They must hold elections
- They must keep meeting minutes
Under such a requirement, the members who are directors may have a higher fiduciary duty than non-director members.
Other states allow the flexibility for manager managed LLC to adopt the management structure that works best, which could include a board of directors. Under these circumstances, the LLC has substantially more flexibility in how the board is established and run than a corporation would.
WHO CAN BE ON THE BOARD OF DIRECTORS OF AN LLC?
Most of the time, people who function as directors are members of the LLC, meaning other members still have input into directing operations (as long as it is not prohibited by the operating agreement).
If the LLC is managed by a non-member, which is permissible, the non-member could be designated as a director at the behest of a member. However, as we mentioned earlier, you may need to provide an incentive for the individual to agree to serve. After all, as a non-member of the LLC, this person does not have the protections and privileges of membership.
A stipend or fee may be the best incentive for a non-member manager to take up a director’s reigns: serving on the board, attending meetings, and providing input.
An alternative would be to give the non-member equity or ownership in the LLC, thereby bestowing ownership. Use caution with this approach because you would now have a manager with a high level of control over the company.
FIDUCIARY DUTY OF LLC MEMBERS
Members can reduce or eliminate their fiduciary duty by appointing a representative to the board per a specification in the operating agreement or other written contract. This is helpful in states that assign the fiduciary duty to the members of the board.
If there are members who do not want to participate directly on the board, they can still be designated as board participants. Their fiduciary duty would depend on state requirements or the governing documents for the LLC.
If your LLC desires to make a more formal arrangement for management, a board of directors is certainly a possibility. Only a manager-managed LLC can have a board, so you would have to consider this at formation. A board of directors is a handy way to align members with appropriate duties and enforce communication.
Consult a business attorney to decide what is best for your business before you form your LLC to determine if a board of directors would be right for you.
