Multi-member LLC signing authority

6 Replies

Forming a multi-member LLC (7-9 members) – how do we handle signing authority for legal documents? Is one authorized signer better than many? What are the pros and cons of each? What is common practice and why. Thank you.

@Andrew Polakiewicz you should name 1-3 managers for the llc and they will have signing authority. On of the deals we do, our attorney will setup loan documents so one person can sign most everything and the other managers will sign a few documents each. I’ve found this way to be the most efficient so you don’t have to wait on a bunch of signatures.

With 7-9 Members, it is not ideal to use a Member-Managed LLC where everyone has signing authority and is considered a "managing member". The typical structure for a real estate investment company with this many members is a Manager-managed LLC. In this structure, only the people who are actively involved in management are authorized to sign and the rest are passive investors.

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Felix: it is possible. Google the Howey test for LLC memberships for determining whether an LLC interest is an investment contract under SEC rules.

"Forming a multi-member LLC (7-9 members) – how do we handle signing authority for legal documents? Is one authorized signer better than many? What are the pros and cons of each?"

Depends on your operating agreement you can specify someone is a GP and has the authority to make spending decisions without regard to shares purchased.

However, if you sell the property, unless the OpAgreement gives someone POA, odds are everyone needs to be in agreement and sign individually.

You also need some kind of buy-sell, in case, for example, one member gets divorced and his share goes partly to their partner that hates the other owners in the LLC. They can really wreak unholy hell that way if they want.

Plus side of a managing partner, decisions are a lot quicker and easier.  I guess you could have a vote on stuff with a simple majority saying yes. 

Downside, you're entrusting a managing partner to spend your money.  When it comes to money, trust is a rare thing.

Originally posted by @Felix Stone :

@Kim Lisa Taylor Bumping this. Would the manager (or the managing member) be selling securities in this case to the other passive members?

Yes, Felix. I see many people try to avoid securities laws by saying they are doing "joint ventures", when in reality they are selling securities. Selling interests in a Manager-managed LLC with members contributing capital and a few key people managing the company would constitute the sale of "Investment Contracts", which are securities.

The only way to avoid that is with a Member-Managed LLC or general partnership structure in which "all members are responsible for actively generating their own profit", and all are responsible for management of the company, which could include opening and closing bank accounts, contractually binding the company, etc. While a member-managed LLC might be feasible with 3-4 members that know each other very well and have identical objectives; when larger groups are involved, it rarely happens. What actually happens is that a few members actively manage the deal while the rest are not actively involved in management. In that case, it doesn't matter if the company is member-managed, because certain members will attest that they didn't participate in management and therefore will likely be deemed passive investors. If the deal is ever scrutinized by a securities regulator (or one of the investors' attorneys), it will likely be deemed to have been the sale of securities without following an exemption (which requires proper disclosures and SEC/state securities notice filings).

In my experience any more than 5 people in a member managed LLC is a recipe for disaster as they can't agree on how things will be done (too many cooks spoil the supper...), so it creates dissension, stress, and in the worst cases, litigation.