Limited Liability Companies (LLCs) come in two basic varieties: (a) those managed collectively by the LLC members and (b) those managed by "managers" who are appointed by the LLC members. To complicate matters, LLC members can also be LLC managers. Let's take the common example of an LLC set up to own and operate an apartment complex. The owners of the LLC (i.e., the members) do not wish to handle leasing, maintenance, rent collection and all the other details that go with operating an apartment complex. Thus, they will hire a management company to run the operations of the LLC that owns the apartment complex. This post will walk through the legal paperwork necessary to set up this arrangement.
First step is filing articles of organization with the state of your choice. See California LLC articles of organization (scroll down to page 3) and Florida articles of organization. This page has links to the articles of organization for most states. You'll notice that in Florida, the managers must be named in the articles of organization. In California, as with most states, the LLC organizer merely checks a box indicating whether the LLC shall be managed collectively by the LLC members or by managers. In most states your LLC charter is issued the same day that it is filed with the appropriate state office. OK, now you have an official legal entity--an LLC. The next step is an LLC operating agreement. Prior posts on this blog discuss its contents so I'll not belabor the point. But in relation to managers, one issue is important to cover in the operating agreement: the division of responsibility between the LLC members and the managers. Is there a dollar cutoff for transactions the members must approve? Are there certain sorts of contracts that the members wish to reserve for approval (i.e., any contract with a duration over one year)? Without any boundaries set forth in the operating agreement, the power of managers to bind the LLC to transactions is theoretically limitless. I also think it is important for the operating agreement, in the case of managers, to set forth the grounds and mechanism for firing the managers.
The next step is appointment of the managers and setting compensation. This can be done in the operating agreement or a separate resolution of the LLC members. Either way, the specific management contract that is to be entered into between the management company (or individuals) and the LLC should be included and approved by the members. I'd attach the management contract as an exhibit. Here is an extensive LLC property management contract from the ABA. Make sure the management contract tracks any restrictions on the authority of the managers to bind the LLC contained in the operating agreement. Third parties dealing the LLC managers for any sizable transaction will certainly ask for a copy of the management contract but might neglect to ask for the LLC operating agreement. Putting restrictions on manager authority both places does the best job of putting third parties on notice of these restrictions. Other things to go in the management contract include the duties of the managers, compensation for services, and grounds for termination. Although it would be unusual in a property management contract, confidentiality agreements for business information of the LLC (such as customer lists) are often found in management contracts.
The last formality is execution of the LLC management agreement. One other potential requirement occurs for an LLC organized under the laws of one state (say California) but owning property or otherwise operating in another state (say Nevada). In this example, the California LLC would need to register as a foreign LLC in Nevada.