LLC Voting Rights: Who Has a Voice?

On average, 4 million new businesses are started each year in the United States. Many of those businesses are organized as limited liability companies (LLCs). Combining the benefits of a corporation and a partnership, an LLC protects its members’ personal assets from business liabilities, avoids double taxation, and provides flexibility regarding its operations, management, and financial and voting rights.

While state LLC laws establish default provisions, LLC members may adopt a written operating agreement that alters those rules, specifying how they want the business to be run. An operating agreement is not required, but without one, members are subject to statutory default provisions that may not align with their interests and goals. This includes the default rules on voting for LLC matters such as adding new members, disassociating members, dissolving the company, and amending the operating agreement.

The Most Common LLC Voting Rights

An operating agreement should be drafted at the time of LLC formation. You can amend the operating agreement by a vote of the members at any time, but this brings us back to our original topic: how are voting rights determined in an LLC?

The first consideration is whether the LLC is set up as member-managed or manager-managed.

• In a member-managed LLC, all members are active in managing and voting on the company’s business affairs. This is the default structure and can work for LLCs with a small number of members who are not only investors, but are active in running the company.
• In a manager-managed LLC, the members/owners leave the management of the company to professional managers, similar to a board of directors in a corporation. Members of a manager-managed LLC can usually vote on major changes, such as amending the operating agreement and adding or removing a member, but they have limited authority to make business decisions, such as entering contracts, hiring employees, and borrowing money. The managers of the LLC are not required to be members.

The default rule in most LLC statutes is member management. However, in practice, most attorneys recommend the use of manager-managed LLCs for increased liability protection. For the company to operate as a manager-managed LLC, this management structure must be specified in the articles of organization or the operating agreement, depending on the state.

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