Establishing Proper Management Rights Can Save Your Closing

Real Estate Investors establishing multi-member LLCs should always consider how broadly or narrowly to define the rights, duties, and powers of their members and managers based on the structures and needs of their respective companies. A thorough declaration of rights and duties in an LLC operating agreement will reduce the likelihood of future confusion and conflict. Furthermore, it will ensure that the members and managers of the LLC understand and have agreed upon each party’s responsibilities and limitations.

Real estate investment LLCs, especially those that either have a member or members out of state or out of the country, or who do business out of state, have especially strong incentives to structure management provisions with care. Limited liability companies can assign limited management duties or rights, such as signatory authority, to parties, without granting those parties full management authority. These non-member managers can save the company time and travel expenses by acting as local agents of the company in certain capacities. Limited liability companies with more complex management needs must give careful consideration to scopes of management authority; operational efficiency should be achieved without sacrificing an appropriate balance of managerial power. Therefore, real estate investors should always consult an attorney who is experienced in entity formation and business transactions before forming their LLC operating agreements.

When assigning management rights and duties, parties to real estate investment LLCs should consider the transactional volume and geographical scope of the company. Companies with more local foci generally find member managed LLC’s to be both sufficient and ideal for their needs. Companies with higher transactional volumes, however, and companies that purchase out-of-state investment properties, may need to designate limited or non-member managers with signatory authority to ensure the timely execution of certain transactions, particularly for purchase and sale agreements, closing documents, as well as vendor and property management contracts Otherwise, closing processes could stagnate or fall apart.

Regardless of how an LLC structures its management, the operating agreement should clearly define the limitations of all its managers to facilitate determining whether a manager has acted within his authority in a transaction. Such specifications are important because they will, in many cases, determine whether an LLC can be bound or found liable for the actions of a particular manager. Furthermore, such limitations will prevent management conflicts from occurring by unambiguously putting all members and managers on notice of the respective powers and limitations of each other member and manager.

Management provisions in LLC operating agreements can either limit or allow managers access to company funds that are necessary for business operations and transactions. These allowances should reflect the company’s projected transactional volume. But like most things in LLC operating agreements, such provisions may be amended to reflect any changes in management or management rights. Such amendments may be appropriate for LLCs that experience growth exceeding what the parties anticipated during organization, as well as when members are added to or removed from the LLC.

For the above reasons, parties involved in the formation of a real estate investment LLCs should not write management provisions into operating agreements without help from an industry professional. A good law firm can best effectuate an LLCs business needs without assigning too much authority to any agent and without allowing certain agents to bind the LLC to certain types of actions or promises.