A Limited Liability Company (LLC) is a versatile legal entity for running a business. Since its relatively recent creation (Wyoming in 1977) it has quickly become an attractive option for real estate investors due to its tax flexibility and strong legal protections.
In practical business operations, many LLCs function either through a designated manager or the collaborative efforts of its members. Under the second model, an LLC may authorize members to make binding legal commitments for the LLC.
Whichever management framework is adopted, the details need to be outlined in the LLC Articles of Organization and the Operations Agreement. These two documents are the solid foundation of an effective LLC.
An authorized member of an LLC is a member (or members) who are authorized by the governing documents to make binding legal commitments on behalf of the LLC.
A manager of an LLC is either a member or an outside party tasked with performing the day-to-day functions of managing the LLC. These duties are outlined in the LLC Operating Agreement.
Typically, the manager is given the power to perform the following for the company:
An important note on LLC managers is that the LLC Manager is not liable for fraudulent statements for the LLC or the actions of any of the members of the LLC.
Before you can understand the difference between an authorized member and a manager in an LLC, you should know the basics of LLC operations. In 2018 just under 200,000 LLCs were established in the state of Texas alone. The popularity of LLCs comes from its legal protections for owners, tax flexibility, and its less formal establishment process than traditional corporations.
As mentioned, a properly established LLC requires two foundational documents: Articles of Organization and the Operations Agreement. The first key step in how to start an LLC is filing the Articles of Organization with the state to outline the formation and purpose of the LLC. Governing the actual processes of the LLC, the Operations Agreement is important to ensure an efficiently run LLC and that it affords the most protections and benefits to its members.
The owner(s) of an LLC are referred to as its “members” and the default management is a democratic vote based on the ownership percentage. All the members enjoy protection from any liabilities taken on by the LLC and the LLC is in turn protected from any creditors of its members.
That said, it is imperative that the LLC Operations Agreement is drafted correctly as an ownership interest in an LLC is not automatically protected against personal creditors. If correctly drafted, however, the most a personal creditor of one of the members could obtain is the cash distributions that that member would have been entitled to.
As one can imagine, an LLC that functions the best and provides a management structure sufficient for the purposes for which it was created will have well-drafted Articles of Organization (legally required to be filed with the state) and Operations Agreement (governing the functional processes of the LLC but not a legal requirement).
Particularly, these documents will contain provisions outlining the duties and privileges of the LLC’s authorized members and managers, if any.
Logically, there are only two options for how an LLC functions from a management perspective: democratically managed by the members or managed by an appointed manager. If it is member-managed then having an authorized member imbued with the power to enter the LLC into legal arrangements will often make practical sense.
As a generalization, the larger the LLC the more practical it becomes to have a manager-managed model for the LLC. Aside from the practical advantages, the other key benefit from having a manager manage the LLC is to allow for passive member investors.
Many smaller LLCs prefer to manage the company as a team with, if needed, one or more members being authorized to sign on behalf of the LLC.
In either case, the key is getting the LLC Articles of Organization and Operations Agreement drafted correctly. With well-worded foundational documents, an LLC is an ideal flexible legal entity for conducting business in Texas.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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