Mid-Atlantic Health Law TOPICS
LLC Operating Agreements
This is the first part of a several part series of articles pertaining to limited liability company operating agreements. This first installment addresses management styles and membership interests.
Many medical practices and other health care enterprises operate as limited liability companies (LLCs), and are, therefore, governed by the LLC’s “operating agreement.” However, the concepts imbedded in such operating agreements are often foreign or confusing to the members of the LLCs. Accordingly, the purpose of this series of articles is to shed some light on those concepts, and to point out some of the pros and cons of dealing with those concepts in alternative ways.
In Maryland, there are two management styles: member managed and manager managed. In a member managed company, the owners are in charge of the day-to-day responsibilities and decisions for the company.
If the company does not have an operating agreement, or if the operating agreement does not specify how the company is to be managed, the presumption is that it is member managed.
Member managed structures can be beneficial for companies with fewer members who want to minimize overhead. It is a time intensive option for business owners, and assumes that all of the members have business acumen.
As member managed structures allow all of the members to bind the company to third party contracts, this can allow the business to be nimble; however, it can also create challenges when members do not regularly communicate actions to each other or when there is a rogue member.
In a manager managed company, the owners appoint someone to manage the day-to-day responsibilities and decisions of the company. This manager can be a member, or a hired party, including a different company. For medical providers, managed service organizations or independent management companies often sit in this role.
In the manager managed structure, the owners delegate responsibilities, eliminating the need for the members themselves to have business acumen. This structure is better for companies with many members. The manager managed structure requires members to trust the delegate, and creates additional costs for management that would otherwise be the responsibility of the individual members.
In a variation of the manager managed company, the owners will opt to appoint a board of directors that operates as the manager. This is frequently used in joint ventures or in larger limited liability companies that have grown beyond management by a single person.
The board of directors can further delegate powers to company officers. While a corporation, by law, has a board and officers, a limited liability company does not. If members want to include a board and officers as part of their structure, the operating agreement must clearly specify that structure.
A member in a limited liability company has a membership (aka ownership) interest in the company. Members do not have stock or shares in the company; those terms are specific to corporations. Some operating agreements will refer to the membership interest as membership units, which is conceptually close to the idea of stock/shares and can be certificated in a similar fashion.
By default, there is one class of membership where all members have the same rights. Owners who want to provide different voting rights, allocate different distributions, or identify licensure or other requirements for regulatory or other purposes, can create different classes of membership.
There are tax implications of creating multiple membership classes in a limited liability company; owners should consult with counsel and their tax advisors before making changes. For instance, if the company is taxed as an S-Corp, in general, all of the owners must have the same class of ownership, except for voting.