By Zak Rosenberg

Over the past few years, we’ve seen the following scenario play out with more and more frequency. You and several business associates want to create an LLC. You decide to use the form Articles of Organization provided by the Louisiana Secretary of State website and file the Articles online. Later, you execute an operating agreement that states the LLC is manager-managed and appoint one of your business partners as the manager. The LLC owns a piece of property and several years down the road, the LLC is ready to sell the property. The manager signs the appropriate certificate of authority and everyone’s ready for the sale. You’re good to go, right? Wrong. Because, in reality, your LLC is member-managed.

How Does This Happen?

The issue stems from the disconnect between the form Articles provided by the Secretary of State and Louisiana Revised Statute 12:1311. Revised Statute 12:1311 provides that“except as otherwise provided in the articles of organization, the business of the limited liability company shall be managed by the members” (emphasis added). However, the form Articles do not contain any reference to whether the LLC will be manager-managed or member-managed. While Article 4 (“Other Provisions”) of the template does provide space for the organizer to add any additional provisions, most organizers fail to articulate how the LLC is managed. Thus, because the Articles do not contain an express statement of management, the LLC defaults to a member-managed LLC, even though the operating agreement may clearly state that it is manager-managed.

The Repercussions

This inconsistency has the potential to delay closings until the LLC’s Articles are amended and the purported manager is given the proper authority to act on behalf of the LLC (not to mention any action taken by the purported manager in the past may be deemed invalid). When LLCs are comprised of several members scattered throughout the country or when the members are complex business entities, it can take a significant amount of time and effort to track down the individual members (or the member’s members/officers) and get them to execute the amendment documents. Ironically, this exact situation is why people often want their LLCs to be manager-managed in the first place!

The Fix

At the end of the day though, even if you’ve used the form Articles, it is relatively easy to fix the management structure. But you can save a lot of time and potential headache by expressly stating in Article 4 (“Other Provisions”) of the form Articles that the LLC will be manager-managed. Or, if you’ve already filed your Articles, you can fix the issue now rather than wait until you’re crunched for time as a closing date rapidly approaches.

Filed under: Commercial Real Estate, Industry News
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