Give Managers Their Power

Item #14 on my formalities checklist asks, “Have you made the appropriate resolutions of the Managers to authorize and document all major company acts?”

In your LLC or corporation, the company’s ruling body (managers in an LLC or directors and officers in a corporation) needs to formally give the manager the approval and official authorization to act on behalf of the company.  This should be done, even if you are the only owner and the manager/director/officer.  Most of the “resolutions” authorizing acts on behalf of the managers are made during the initial organization meeting of the company owners and managers.  The resolutions are simply written statements that authorize specific actions to be taken on behalf of the company.

In a corporation, the bylaws lay out what authority the officers and directors will have. In an LLC, the operating agreement will lay out all of the LLC management authority requirements.  Both types of entities require maintenance, including the requirement that you hold company meetings and keep minutes of what the owners/members resolve.  Once the owners have agreed to allow the managers to perform specific acts, then a resolution needs to be drafted to “transfer that approval” to the managers and to give third parties “evidence” that the authority has been granted.  All business resolutions for both LLCs and corporations need to be documented both in the minutes and by written resolutions.

The corporate bylaws or LLC operating agreements will specifically state that certain actions should be taken only after the managers/directors have been given the authority by the owners/members.  These actions need to be authorized by a written resolution.  Because most of my readers have LLCs, the rest of this article will use the LLC terminology, but know that the same principles apply to corporations, even though a different terminology is used for the corporations.

The resolutions protect the managers from claims of the members that managers acted outside of their authority when dealing with company matters.  Resolutions also give third parties, such as banks and credit companies, assurance that the person they are dealing with has the right to make the deal with them and represent the company.  A prudent third party dealing with a company will often demand verification (a resolution) from the company stating that the person they are dealing with has authority to represent the company in the specific matter being addressed.

Minutes regarding this resolution need to note that it was made, but do not need to include any of the reasoning behind it. Short and simple, while still including all the most pertinent information such as the date of the resolution and the actions authorized, is best.

The LLC operating agreement defines what the members do and what the managers do. The operating agreement is the company rule book.  You have to read the rule book.  If you don’t follow the rules and just set them aside, then your creditors, the courts, and everyone else is free to set aside the rules as well.  You will lose your asset protection.

Your operating agreement literally becomes a checklist to determine what the responsibilities of the members and managers are. For example, who has to approve debt incurred by the company? Who approves leases and contracts entered into by the company? If the LLC operating agreement says that the members have to approve these things, then you need to have a meeting and keep minutes authorizing the lease, debt, or whatever else is identified in the operating agreement as requiring authorization.  The meeting can be done post approval of a lease, but the members will need to at least ratify the lease that was entered into.  It is best if this authorization was given in advance.  The third party dealing with the company really should require prior approval.  For example, the mortgage company really shouldn’t let the company proceed with a loan until they are satisfied that the manager has authority from the members to enter into the loan.

In addition to what the operating agreement lays out as requiring authorization, managers should “cover their tails” by having members approve their actions.  For example, large purchases and large financial transactions should probably be authorized in advance.  Even if you are the member and the manager, you have to follow the procedures; otherwise, your company is a sham.  When you don’t treat it right, others aren’t obligated to treat it right either.  Think!  If I were a manager and the owners were out to get me, what would I do to cover my tail?  If you can put yourself in that type of a mindset, then you will be managing your LLC properly.

While large companies are served well by having layers of management separate from ownership, little companies often do better to require management to be centered in the hands of those who also own the company as members.  More or less the LLC will probably be member-managed.  A member-managed structure may make it more difficult for creditors to gain control of the company.  If you are in the position where you are the member and the manager, it requires extra thought, because you have to remember which role you are acting in, and you need to keep all your documentation straight. If you just ignore the requirements of the LLC operating agreement, when you get sued, the argument will be, “This isn’t a real company. It’s just your alter ego.” Unless you can show the judge that it is a real company, you will lose your corporate shield.