Limited liability companies are the premier vehicle for businesses these days. Not only is LLC legislation far more current than laws governing corporations or limited partnerships, but LLC laws address many of the shortcomings found with corporations and limited partnerships.
One of the most compelling features of a limited liability company is the division of management from ownership. In the case of a corporation, shareholders own the corporation and appoint directors; the directors in turn appoint officers. Thus, shareholders of a corporation ultimately control who serves as a director or officer. In a limited partnership, the general partner – who is a part owner of the limited partnership – holds the managerial rights.
Limited liability companies dispose of these shared ownership and management concepts, instead offering an entirely different paradigm. With a manager-managed LLC, ownership and management are entirely discrete roles. “Members” own the LLC, and “managers” manage the LLC. A manager need not be an owner of the LLC whatsoever.
Under the default provisions of LLC law, the members of an LLC appoint the managers. However, this can be varied in the LLC operating agreement so that someone else – theoretically anyone – other than a member can appoint the managers. For example, many operating agreements provide that the manager appoints his or her successor, or that the members appoint the managers subject to the consent of a third party.
Lighthouse invented the concept of the LLC protector, and we have been utilizing protectors in many of our LLC operating agreements for three decades. A “protector” is someone who is neither a manager nor a member of the LLC, but whose consent is required in order to make fundamental changes to the LLC. In one example, an operating agreement may provide that the LLC protector has sole authority to appoint or remove the LLC manager. Another common variation is for the members to be able to appoint or remove the LLC manager but only with the LLC protector’s consent.
The division of management from ownership offers several distinct advantages. First, the members of an LLC can engage a professional LLC manager such as Lighthouse to direct the affairs of their LLC without having to share ownership of the LLC. If the manager is removed or replaced in the future, ownership of the LLC remains unaffected.
Another key advantage of separating management from ownership concerns wealth preservation and asset protection. If a member suffers a liability or judgment, the member’s creditor may have recourse against the member’s economic interest in the LLC, but the creditor has no say in the decisions of the LLC manager. Under the default provisions of many state LLC statutes, as well as the terms of a properly drafted operating agreement, the member’s creditor cannot remove or replace the manager.
Likewise, if the manager suffers a personal liability or judgment, the manager has no ownership interest in the LLC that would be subject to the claims of a creditor. While the manager’s compensation may be subject to garnishment, the creditor has no ability to interfere with management of the LLC or make a claim against LLC assets.
The total isolation of ownership from management under LLC law enables many advantageous planning options for the members of an LLC to consider. Lighthouse is the world leader in LLC planning, and our service team has unparalleled experience in advising on the proper structuring of LLC ownership and management to achieve planning objectives. Contact us if you would like to schedule a paid consultation to discuss how this concept may be utilized to your advantage.