Documented Business Actions
Depending on your management structure, some banks and lenders may require your LLC to pass a resolution confirming who has the authority to sign authorizing documents. No matter the purpose, resolutions are a useful way to keep records of business decisions and can help avoid costly disputes.
Doing Business with Other Companies
Another common reason an LLC may choose to pass a resolution is in the course of doing business with other companies. This can be especially important when deciding to add a corporation or another LLC as a member. Adding a new member to your LLC can have a long-term impact on the company’s financial structure, tax structure, and how it votes and makes important decisions moving forward. It can be more difficult to remove a member from your LLC than it is to add one, so taking the time to discuss and vote on the decision is critical.
Who Has the Authority to Make Resolutions?
Any member can propose a resolution, and each resolution generally requires a majority vote to pass. In some cases, banks, lenders, or other third parties may request that a resolution be passed before your business can open an account, take out a loan, or complete any number of other business transactions.
Set the Rules in Your Articles of Organization or Operating Agreement
The rules and procedures for voting on an LLC’s resolutions are set forth in either your articles of organization or your operating agreement. Typically, a majority vote is required to pass a resolution. However, it is permissible to set rules for other voting percentages as your business sees fit. While an operating agreement is not required by most states, drafting one is an incredibly important step in forming a well functioning business.
Your operation agreement should also set forth the conditions under which your LLC will require resolutions. Whether member-managed or manager-managed, there is no need to call for a resolution to determine every issue faced by your business. It is wise, though, to develop a clear plan for when a resolution is appropriate.
Finally, you should determine how to validate your resolutions. This can include written consent, verbal consent, or any other option your company agrees to. Typically, once a resolution is passed, those who voted in favor will sign it, while those who voted against it will not. No matter the voting breakdown, however, all members must abide by the terms of the new resolution.
Examples of LLC Member Resolutions
LLC member resolutions are typically used to seek majority approval or official documentation of important company decisions. Some common issues put up as resolutions include:
- Opening a bank account for the LLC
- Renting a safety deposit box
- Obtaining a loan
- Buying or selling real estate
- Signing contracts that carry significant financial risk
- Delegating LLC authority
- Approving LLC profit distributions
- Approving additional capital contributions
- Approving new members
- Approving the transfer of memberships
Single-Member vs. Multiple-Member Resolutions
While resolutions are far more common in multi-member LLCs who use them to document groups decision or come to a consensus on important issues, a single-member LLC can benefit from resolutions and, in some cases, may be asked to provide them. Just as banks, lenders, and other third parties can seek out resolutions from multi-member LLCs before completing a business transaction, they may require the same of a single-member LLC to clarify authority.
Although it may seem unnecessary to pass resolutions with yourself, proper documentation can be even more useful to a single-member LLC should any type of dispute arise either within the company or with outside business associates or vendors.
What to do in a Management Deadlock
If you have an even number of LLC members, there is a possibility your voting may result in a tie. The best way to avoid getting trapped in a deadlock is to set forth a procedure to deal with this situation ahead of time. This is another important point to include in your articles of organization or operating agreement. Failure to do so could have grievous effects on the LLC, including substantial expenses, loss of time, possible mediation or arbitration, litigation, or even dissolution.
Deadlock provisions are typically meant to do one of two things, create a mechanism to directly break a tie or establish a policy or procedure to motivate members to come to an agreement before the deadlock affects company assets or business interests. Some popular options include:
- External tie-breaker: A tie-breaker is usually a designated group or individual given the authority to rule one way another in the face of a tie. It’s important to choose a tie-breaker who is familiar with your company and industry so that all members feel confident in their ability to make an informed decision.
- Rotating/Alternating or Casting Mechanisms: This method involves rotating a tiebreaking, or casting, vote among LLC members rather than bringing in an outside voice. When a deadlock occurs one member is given the authority to break the tie. During the next deadlock, the tie-breaking vote passes to a different member.
- Buy/Sell Provisions: Meant to force a consensus, this option allows one member to sell their interest in the LLC to another member. There are several ways to execute this option including the use of an independent appraiser to place a valuation on a member’s interest, and the “shotgun” method whereby one member makes an offer to another that they can either accept or refuse. While the latter sees a higher rate of litigation, if properly executed, both options can effectively break a tie without dissolving the LLC.
- Put or Call Mechanisms: A “call” is the right to purchase another LLC member’s interest for a predetermined price, while a “put” is the right to sell your interest due to certain events. While this option is popular, it can be more difficult to draft. The members must determine valuation and decide what events will trigger this mechanism. Often, it will not apply to all deadlocked votes, but rather be reserved for specific issues like major financial decisions.
- Partition or Sale of the Company or Its Assets: A forced partition or sale of the company in the event of deadlock is another good motivator to find an agreement. This option does just what it says. It allows LLC members to create a plan to either divide the company up among the agreeing members or sell the company altogether if a resolution cannot be achieved.
If all else fails, LLCs will often turn to litigation or other dispute resolution options as their last resort. These options include:
- Involuntary or judicial dissolution: A member seeks involuntary dissolution of the LLC in the face of an unbreakable deadlock that threatens irreparable damage to the business.
- Custodianship or receivership: Somebody is appointed by the court to run the business because the deadlock is so severe it is preventing regular business operation.
- Injunction: A court order prevents or requires certain action from the business to help prevent irreversible harm that may be caused by the deadlock.
- Specific performance: A member or manager requests that the court force another member to perform their contractual obligations under the operating agreement.
- Judicial expulsion: This action removes a member from the LLC entirely.
- Mediation or arbitration: Mediation is a voluntary negotiation led by a neutral party meant to seek a resolution to a dispute, while arbitration is akin to a privately held trial led by neutral individuals who are paid to serve as judges.
At the end of the day, the best thing your business can do to prevent ending up in any of these situations is to put the necessary time and effort into crafting an operating agreement that can guide you through even the most difficult disputes and disagreements your business may face.
An LLC Member Resolution Basic Template
An LLC member resolution is a simple document that will typically include the following:
Descriptive Title: The title should clearly lay out the issue or issues being considered.
Resolved Issues: Details will vary depending on the issue at hand, but this section should include information relevant to the specific issues being decided. If you are voting on leasing a property, for example, this section will likely include the address of the property, length of the lease, monthly rent, and basic lease terms.
Signatures: A passed resolution must be signed by members who voted in favor of the resolution.