LLC Default Rules That May Surprise You

Posted by William J. Piercy on

Limited Liability Companies (LLC) are increasingly the business entity of choice for many entrepreneurs because of their ease of organization, simple tax structure, and flexibility.  An LLC can be governed by just about any set of rules that its members dream up.  These rules are typically memorialized in a written operating agreement.  But what happens when there is no operating agreement?  In that instance, Georgia law imposes a set of default rules, some of which may surprise you.

One Member – One Vote – When an LLC has more than one owner (referred to as a member), each member has a vote in the company’s management and operational decisions.  LLC members often assume that the strength of that vote is proportional to the extent of the member’s ownership interest.  For example, it seems logical that a member holding 70% of the company could out vote the other two members who each hold 15%.  While many operating agreements provide for such proportional voting, this is not the default rule.  Instead, in the absence of a written operating agreement that provides otherwise, each member gets one vote of equal weight.  In this circumstance, the two members holding a cumulative 30% of the company can out vote the member who owns 70%.

Equal Allocation of Profits – Each LLC member has the opportunity to share in the company’s profits.  While many operating agreements provide for profits to be allocated proportionally based on ownership interests, this is not the default rule.  Instead, in the absence of a written operating agreement that provides otherwise, profits are to be allocated equally among the members.  In our example in which one member holds a 70% interest and two others each hold 15% of the company, the default rule mandates that each member receive an equal third of the company’s profits.

These default rules are not intrinsically good or bad; they just are.  If they work in your favor, use them.  If they don’t, negotiate around them.  Just don’t let them surprise you.