You’re probably wondering what constitutes an LLC board of directors? Who are they? What are their rights and responsibilities? Unlike corporations, LLCs are not required by law to have a board of directors, but they can have a board of advisors. A board of advisors works similarly and considering their advantages, and an LLC should consider having a board of advisors.
FLEXIBILITY OFFERED BY LLCs
One of the primary reasons behind the popularity of the LLC structure is the flexibility that it offers, and nothing sums it up better than its ability to have a board of directors. It is one of the widespread modifications in an LLC structure, especially for relatively more extensive LLCs and the ones that have multiple ventures.
To have a structure for LLC in this way, however, it needs to be initially set up in the operating agreement of the LLC. Having this structure drafted in the operating agreement will ensure that it has legal standing. It will also ensure that the selected directors or ‘advisors’ meet regularly to discuss various matters related to LLC. Such a structure also adds an ingredient of formality in the operations of an LLC.
REQUIREMENTS TO BE ON THE BOARD OF DIRECTORS OF AN LLC
Primarily, the members of an LLC are entitled to be on the board of directors of an LLC. However, it is not always the case, as the managers can also be on the board of directors. However, the non-member who is asked to be on the board should be fairly compensated for it, as they don’t enjoy the protections and privileges enjoyed by the members.
BENEFITS OF HAVING A BOARD OF DIRECTORS IN AN LLC
Only if you understand the board of directors’ structure can you make the maximum of the board of directors in an LLC. Board of directors is a very alien concept to LLCs, and whenever we hear of a board of directors, the first thing that comes into our minds is corporations.
However, as we have already discussed, board structure is very effective for LLCs, and it can yield significant benefits for your LLC if you understand the system well.
Let’s say, you are operating multiple ventures under an LLC, and you have set up a board of directors for LLC and have appointed directors from every venture; it will assure that everyone is heard equally and have an equal say in the critical decisions of the LLC. It helps make the directors of every venture feel at home and ensures that every venture succeeds.
You can further draft a quorum requirement for the board of directors’ meetings. It will also make sure that at least one representative from every venture is present at the meetings, and no decision is made without everyone having a say in it.
DIFFERENCE BETWEEN LLC & CORPORATIONS’ BOARD OF DIRECTORS
While we have already discussed how a board of directors in an LLC is similar in many ways to that of a corporation, they are primarily very different structures. The board of directors in a corporation, for example, is sui generis in its nature. It means that the board of directors in a corporation is by statute, and it does not depend on the shareholders of a corporation. There is a very high probability that a corporation has its board of directors before it has any shareholders.
Similarly, the way a board of directors in a corporation manages its affairs also depend on the statute. Over the years, courts across the United States have very rarely tried to restrict the role of boards in corporations.
On the other hand, the board of directors in an LLC is not by a statute but depends upon a contract. Since there does not exist any legislature for LLC board of directors in any state, the role, responsibilities, and limitations of a board of directors in an LLC will depend entirely on the operating agreement of LLC. Since the board of an LLC depends upon the operating agreement, it raises some peculiar questions that don’t exist for corporations.
For example, corporate laws across the United States do not conceptualize the directors’ board as agents or representatives of the shareholders. Contrary, if the board of directors in an LLC is created by the members of an LLC, at least on an inter se basis, the board is then exercising a collective authority delegated by the members of the LLC. It will then be viewed collectively as their agent.
In this scenario, the question raised here is: is the board of directors of an LLC working as an agent of the members, or is it working to control the LLC’s affairs and, subsequently, its members? The answer to such questions always lies in drafting the operating agreement in a way that suits what you are looking for from your board of directors.
DUTIES OF LLC DIRECTORS
Now that we have discussed the legal aspects of the board of directors of an LLC, we will have a look into the duties of directors of an LLC – what they should and should not be doing:
- Senior management of the LLC and providing all the relevant instructions.
- Determination of the LLC’s management organization in the scope of the operating agreement.
- Looking after the accounting and financial planning to make sure that LLC’s books are well-managed.
- Organizing LLCs’ annual financial statements and reports and coordinating all yearly activity reports of the LLC.
- Preparing and proceeding with GA meetings and GA resolutions.
- Issuing bankruptcy notices when the LLC is in deep financial crisis.
However, there is no such thing as a detailed set of directors’ duties, as the operating agreement will ultimately decide the responsibilities of the directors, and there could be additional duties for directors from what has been mentioned above.
DAMAGE-RELATED RESPONSIBILITES OF LLC DIRECTORS
If a director of a limited liability company violates his liabilities as listed in the operating agreement, and as a result, LLC bears damages; the director will be responsible for the damage to the LLC, the rest of its members, and everyone who suffered the damage.
However, the responsibility of the damage can only be directed to the director when there is a simultaneous existence of four main elements; (i) wrongful act, (ii) resulting damage, (iii) fault, (iv), and a causal link.
Four of these elements should exist in the main event of the damage at the same time. A causal link defines the wrongful act and the resulting damage from it, and it is mandatory. If there is no causal link between a wrongful act of a director and resulting damage, a director cannot be held responsible for the damage.
Frequently Asked Questions
In this section, we have looked at some of the frequently asked questions related to the LLCs’ board of directors and have provided you with their answers:
SHOULD AN LLC HAVE A BOARD OF DIRECTORS?
It is not required by law for LLCs to have a board of directors. However, it is a very effective management structure for LLCs to have, primarily when multiple ventures are operating under an LLC.
CAN AN LLC HAVE A BOARD OF ADVISORS?
As the structure of an LLC allows much flexibility to its owners, it can name a board of advisors by creating a relevant provision in the LLC’s operating agreement.
CAN A SINGLE-MEMBER LLC HAVE A BOARD OF DIRECTORS?
As described earlier, while LLCs are not required to have a board of directors, they can always choose to have a board of directors. When the LLC has only a single member, it can create a board of directors if it has managers working in it, who then can be directors on the board. However, if there is only one member in an LLC and there are no managers, the idea of having a board of directors is not practical.