It certainly isn’t commonplace to think of the limited liability company (hereinafter “LLC”) as having a board of directors. In fact, it may be that most individuals, upon hearing the words “board of directors,” immediately assume the topic of conversation revolves around the action of some corporation. In other words, it might be thought that having a board of directors is exclusively reserved to corporations, and not LLCs.
I’ll take the liberty and cut through your anticipation: they are not. By way of introduction, all business entities are persons under the law by means of the contracts that create them.
For example, the LLC is formed by first filing its articles of organization with the Division of Corporations. Next, it is recommended that the future members/owners of the LLC draft an operating agreement. The latter governs both the operation of the company and relationship between the members; in other words, you contract with the other person(s) to decide what your obligations and duties will be both to other members and to the company itself.
As with all contracts, then, at least with those that do not break any laws, there is an immense amount of flexibility as to what to put in them. Regarding the LLC, then, the members can choose how such business entity is managed by putting the terms of management in the operating agreement. [Remember: the correct terminology is members for an LLC and shareholders for a corporation.]
Thus, it is possible to form an LLC but have it structured, in certain ways, as a corporation! And this is exactly what I recently did for a client of mine.
First, remember that the LLC can either be member-managed or manager-managed. In the first scenario, of course subject to the terms of the operating agreement, all members share equal rights to management. In the second scenario, however, and of course subject to the terms of the operating agreement, only the managers (who can also be members or non-members) are authorized to manage.
A client of mine wanted a more formal and rigid management structure that was akin to the corporation. This is not to say, though, that the member-managed and manager-managed LLCs are any less “formal.” But, keep in mind that the LLC is a relatively new business entity and sometimes certain people are more comfortable with the corporate structure as opposed to the hybrid LLC’s manager/member type structure.
And this was the case. Therefore, I recommended that we create a board of directors, just as in the corporation, for this client’s limited liability company. Now, instead of signing checks as a manager or authorized member, he would be signing them as president. Beyond mere appearances of formality, though, the board of directors served the greater purpose of creating a president, vice-president and treasurer, each with different powers and capacities.
Of course, this suited the LLC well as all members had varying degrees of business acumen and each could bring their own set of unique skills to the table. In addition, the members, very eerie of any sort of deadlock or fallout between them, required that the LLC hold annual meetings. This way, just as in the corporation, the members would be required to meet and talk about such issues relevant to the company and pertinent to proper operation. In other words, it encouraged dialogue which in turn decreased the likelihood of business disputes.
In essence, the LLC had the management structure of a corporation — annual meetings and a board of directors — but preserved the defining characteristics of the LLC: (1) ease of formation; (2) better asset protection; (3) and overall flexibly with tax and foreign ownership issues.
If you are interested in a similar structure or would like to comment on the article please feel free to (1) comment; (2) send me an e-mail; or (3) explore my blog in English or Spanish.
Ronald Iacone is the managing and founding partner of Iacone Law. He focuses his practice on asset protection representation, business and international law, and appeals to the interrelatedness of the three to best discuss your issue and solution.