Does an LLC Need a Board of Directors (or Board of Managers)?
Does an LLC Need a Board of Directors?
If you are interested in starting an LLC, one consideration you need to think about is how to structure your business. I get all kinds of questions on the LLC structure, things it can and cannot do. One common question, and the question I am going to address today: does an LLC need a board of directors?
To get straight to the point, NO. It does not need a board, but it can have a board. A hallmark of LLCs in this area – as with so many other areas – is flexibility.
However, there is the separate question of whether your LLC should have a board. Of course, consult with your lawyer because there are many pros and cons that come with choosing to have a board of directors for your LLC and the evaluation of your individual circumstances can’t really be done by anyone but you and your lawyer.
Nonetheless, this article is intended to help you review some of the potential benefits and drawbacks of choosing to appoint a board of directors for an LLC – it is meant as a preliminary discussion-starter for you and your attorney; nothing else. Before any decisions are made, it is strongly advised to consult a business attorney who can help you ask more relevant and particular questions.
If you are just starting out on your business venture, you may not know what an LLC is. An LLC – or limited liability company – is a legal entity that provides its owners with liability protection, if operated properly. Limited liability companies are something like more modern and more flexible versions of corporations/limited partnerships. This protection (if the entity is formed and operated correctly) provides that the owners, or members, are not personally responsible for the company’s debts and legal obligations such as lawsuits or other claims. Only the company’s assets are used to satisfy any debts or legal claims in the event of a liquidation or bankruptcy. An LLC can be a good choice for small businesses because of its flexibility and relative ease of operation. They are also a little easier to set up and maintain compared to other business structures.
How do LLCs work?
LLCs are typically run by their owners, who have the power to make all business decisions. However, the owners may choose to manage the business directly, or may choose to appoint managers to run the day-to-day operations. These managers may or may not be members of the LLC.
What is a Board of Directors?
If you want to know whether or not a board of directors is the right move for your company, then you need a solid understanding of what a board directors actually is. A board of directors is a group of individuals that are elected each year by shareholders of a corporation to oversee the company’s operation. The board is responsible for making business decisions, like setting corporate strategy, hiring executives, and approving major expenditures.
What is a Board of Managers? Is It Different?
If an LLC elects to have a board, the members of the board are generally called managers, rather than directors. The terminology is different, but the function is relatively similar.
Does An LLC Need a Board of Directors (or a Board of Managers)?
Unlike a corporation, an LLC is not required to have a board of managers (functionally analogous to a board of directors). It is optional. The LLC can, at its formation, elect to have a board or not have a board. From that point forward, the LLC must be managed according to that choice made at formation.
If an LLC chooses not to have a board of directors, then the members of an LLC will directly make all business decisions. We call this being member-managed. It is a more direct and simpler style of management. It can be better for the most involved owners of closely-held companies without third-party investors.
On the other hand, if the LLC does choose to have a board of directors, then the members of an LLC will elect managers who will sit as a board to appoint officers and make business decisions. We call this being manager-managed. It is a more indirect style of management that is more complicated but potentially requires much less effort from the members. It can be better for members who have many business interests and are not solely focused on this LLC.
As mentioned above, a board of managers can have both benefits and drawbacks. Without evaluating the specifics of your LLC, let’s get into a little bit more depth and detail on the potential advantages and potential disadvantages of electing to have a board of managers.
Some Advantages of Having a Board of Managers (or Board of Directors) for an LLC
1. Access to Expertise
One possible advantage of having a board of managers (board of directors) is that it can provide an LLC with access to a broad range of expertise. A board of managers (board of directors)s has the potential to bring on individuals with diverse backgrounds and skill sets. A new LLC can benefit from the additional resources and breadth of knowledge brought on by theboard of managers (board of directors).
2. Improved Governance
Another advantage of having a board of managers (board of directors) is that it can help improve the LLC’s governance. A board of managers (board of directors) can provide a higher level of oversight and accountability, ensuring that the company is being run in a responsible manner. The board can also ensure that members or officers are held accountable for their actions.
3. Increased Credibility
A board of managers (board of directors) can also increase the LLC’s credibility with investors and other stakeholders. This goes hand in hand with the improved governance. Investors may be more likely to invest in an LLC that has a board of managers (board of directors), because they feel more confident that the company is being run in a responsible and professional manner.
4. Long-Term Planning
Finally, a board of managers (board of directors) can help an LLC with long-term planning. A board of managers (board of directors) can oversee, develop, and implement a long-term strategic plan. A growing LLC can benefit as it looks to grow or expand its operations. The board can provide guidance and support through new challenges and opportunities.
Some Drawbacks of Having a Board of Managers (Board of Directors) for an LLC
While there are several advantages to having a board of managers (board of directors), there are also some potential drawbacks to consider:
1. Increased Costs
One main drawback of having a board of managers (board of directors) is the increased cost. The individuals will likely need to be compensated for serving on the board, which can be a significant expense for a budding LLC. Additionally, the LLC may consider investing in additional administrative support to help manage the board.
2. Reduced Control
Another potential drawback of having a board of managers (board of directors) is that it can reduce the members’ control over the company. With a board of managers (board of directors), members will need to consult with the board on major business decisions. The additional step of the board’s decision-making process may make decisions take longer especially if there are disagreements between the members and the board.
3. Increased Legal Obligations
A board of managers (board of directors) can also increase the LLC’s legal obligations because the board members will have fiduciary responsibilities to the company. A fiduciary duty means that they must act in the best interests of the LLC at all times. If the board fails to fulfill its fiduciary duty, it could lead to legal disputes and potential liability for the board members and the LLC.
In conclusion, an LLC is not required to have a board of managers or a board of directors, but there are situations where having one may be beneficial. A board can provide the LLC with access to expertise, improved governance, increased credibility, and support for long-term planning. However, having a board can also come with increased costs, reduced control for the members, and increased legal obligations. Ultimately, the decision to have a board should be based on the specific needs and goals of the LLC. It is important to consult your business partners and an attorney to carefully weigh the advantages and disadvantages before making a decision.