Operating Agreements

Management Structure and Decision Rights

Member-managed vs. manager-managed, the three-tier decision matrix, voting mechanics, and deadlock resolution.

Management Structure: Two Models

Member-Managed LLC

All members participate in management and have authority to bind the LLC. Any member can enter contracts, hire employees, and make day-to-day decisions on behalf of the company.

Best for: Small founder teams where all members are actively involved in operations.

Risk: Without clear decision rights documented, any member can theoretically commit the LLC to obligations. The operating agreement must specify limits.

Manager-Managed LLC

One or more designated managers (who may or may not be members) have management authority. Other members are passive investors without management rights.

Best for: LLCs with passive investors who contribute capital but don't participate in operations.

The Three-Tier Decision Matrix

Not every decision requires the same level of formality. A well-drafted operating agreement defines three tiers:

Tier 1: Day-to-Day Decisions (No Vote Required)

Actions within the ordinary course of business that any managing member can take unilaterally:

  • Executing contracts below a dollar threshold (e.g., under $5,000)
  • Hiring and firing employees below a salary threshold
  • Routine vendor agreements
  • Marketing and product decisions

Tier 2: Major Decisions (Majority or Supermajority Vote)

Actions outside ordinary business that require formal approval:

  • Contracts above the dollar threshold
  • Taking on debt or lines of credit
  • Significant capital expenditures
  • Entering new lines of business
  • Changing member compensation

Tier 3: Fundamental Decisions (Unanimous or Supermajority)

Actions that fundamentally change the company:

  • Admitting new members
  • Selling the company or substantial assets
  • Amending the operating agreement
  • Dissolving the LLC
  • Changing the ownership percentages

Voting Mechanics

Per-capita voting: Each member gets one vote, regardless of ownership percentage. A member with 5% has the same vote as a member with 50%.

Proportional voting: Votes are weighted by ownership percentage. Standard in operating agreements and usually more equitable.

Deadlock Resolution

50/50 splits create deadlocks when members disagree on a major decision. The operating agreement should specify resolution mechanisms:

  1. Mediation — Required before any legal action
  2. Tiebreaker member — Designate a third party (advisor, attorney) with a casting vote on specific categories
  3. Buy-sell provision — Either party can trigger a buyout process to break the deadlock
  4. Arbitration — Binding decision by a neutral arbitrator

Salary vs. Distributions

Guaranteed payments (like salary) are paid to members for services, regardless of whether the LLC is profitable. They are deductible by the LLC and ordinary income to the member.

Profit distributions are paid to members proportional to their ownership percentage (or as specified in the operating agreement) from LLC profits. They are not deductible by the LLC.

Most operating LLC founders take guaranteed payments (treated like salary) for their regular work, plus profit distributions when the company is profitable.

Example

markdown
// Decision rights framework
type DecisionTier = 'day-to-day' | 'major' | 'fundamental';
type VoteRequirement = 'no-vote' | 'majority' | 'supermajority' | 'unanimous';

interface DecisionRule {
  tier: DecisionTier;
  examples: string[];
  voteRequired: VoteRequirement;
  noticeRequired: boolean;
  quorumRequired: boolean;
}

const decisionMatrix: DecisionRule[] = [
  {
    tier: 'day-to-day',
    examples: [
      'Contracts under $5,000',
      'Standard vendor agreements',
      'Hiring below $80K salary',
      'Product and marketing decisions',
    ],
    voteRequired: 'no-vote',
    noticeRequired: false,
    quorumRequired: false,
  },
  {
    tier: 'major',
    examples: [
      'Contracts over $5,000',
      'Taking on debt or credit lines',
      'Capital expenditures over $10,000',
      'Changing member compensation',
      'Entering new lines of business',
    ],
    voteRequired: 'majority',
    noticeRequired: true,
    quorumRequired: true,
  },
  {
    tier: 'fundamental',
    examples: [
      'Admitting new members',
      'Selling the company or major assets',
      'Amending the operating agreement',
      'Dissolution of the LLC',
      'Changing ownership percentages',
    ],
    voteRequired: 'unanimous',
    noticeRequired: true,
    quorumRequired: true,
  },
];

function classifyDecision(description: string, dollarAmount?: number): string {
  if (dollarAmount !== undefined && dollarAmount < 5000) {
    return 'day-to-day — no vote required';
  }
  if (dollarAmount !== undefined && dollarAmount >= 5000) {
    return 'major — majority vote required with notice';
  }
  return 'review against your operating agreement decision matrix';
}
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