"Manager Managed" LLC, and the Operating Agreement

[Bienes Raices]

I formed my LLC a few months ago using a service, and received the Articles and Operating Agreement by mail from them.

The service advised me to make the LLC "Manager Managed" (with myself as the manager), rather than "Member Managed", so I did. I told them I wasn't sure whether there would be any other members in the LLC, or just myself, and they said this didn't matter, that it could still be "Manager Managed", even if it was a single member LLC.

As it turns out, I need to keep the LLC with me as the only person in it, due to issues with the homeowner's insurance carriers in this area.

The operating agreement that I received from the LLC formation service has several places to be filled out and signed. It has one sheet where the members agree to elect a person as manager, and another sheet where all the members are supposed to be listed. However, there are no "members" in this LLC--there's just me, the manager.

Should I leave these pages blank, or fill in my name and put "manager" in parentheses, or try to find a different operating agreement that works for a single member LLC? The service keeps telling me that no one will ever see the operating agreement, but if I were ever sued, I wouldn't want to have to produce it in court and have the judge claim it was a sham because it was set up for multiple members, when it's actually a manager-managed LLC with only one person in it. Thanks.

[Bill Gulley]

Hi, IMO, if many investors would simply learn to do what is required and stay out of trouble together with having an attitude of doing the right thing, they would never have anything to worry about in the first place. All of these doom and gloom protectionists are just full of crap. Books about, Oooo, when you get sued, and when your tenant breaks their leg on your porch, you'll lose everything if you don't buy my book!

I have been at this stuff longer than most everyone on here that speaks up regularly, I think Rich and I are the old guys at this. I can't speak for Rich, but I have never lost a lawsuit and was only threatend a couple times where it even got close to a real claim, buyt both fell apart on them. I know I have done more deals so putting that into perspective, the risk in the real estate business is fairly low if you mind your manners and try to do the right thing. And I think that most of you know from my rants and raves that I'm really not a guy that gets walked on either, but then I don't pull stuff on others either.

So, what is it that makes all of this hidding out such an issue? It's your imagination and war stories! If you're planning on robbing banks as a side line and want to hide out, put your properties in someone elses name that has a low risk level of going bankrupt or getting divorced!

No bank is going to use a due on sale clause to call a note due if you transfer a property from your name personnally to your closely held trust or LLC. If anyone thinks so, I'd like the circumstances....because that was not the issue if there ever was a loan called.

I know there are many attorneys on this site as well, so jump in here and tell us in anystate in the union where the due on sale clause was the basis for accelerating any note to maturiy arising from a transfer of the collateralized property from the borrower to his/her closely held trust or LLC.....anyone?

You guys can find due on sale clause issues here on BP, what the DOS clause is, and the purpose of this risk management tool.

The passive income generated in your LLC is allowed when you are not directly involved in the management of the LLC. If you are the manager as an individual and claim that your income is passive as a memebr of the LLC, that may very well be depending on how much money you claim as the manager and being retained by the LLC. But, if you are audited and the powers to be see your arrangement as a sham transaction to manipulate the income and your income as a manager is significantly less than what would be appropriate for the duties performed, then you may have a problem. There are many gray areas to assessing tax treatments of income passed from one entity to another with a closely held owner/member/manager. And if the IRS is getting the short end as they define it, not anyone on here, you'll need to be able to convince them.

Most people, from what I have seen on here, have started their LLCs from documents that they swiped from someone else, off the internet or copied from some other source. I would say that few have actually gone to a good attorney and had documents as well as a good business plan drwan up for their business. I would say that most have never been to court and had to defen their LLC structure, the Operating Agreement of had any experiences where they got caught with their pants down because they failed to do something in their LLC, so my point is that the risks fo actually having to do so are very low. To those you messed up and lost everything, you were not properly insured.

I had hoped that we were going to have an educational type thing on LLCs, Josh may still be working on that but I'm sure I heard something about it awhile back. LLCs should be designed for the specific business paln and needs of the Members, not filed as a means to hide your assets or CYA in the event you mess up.

In all LLCs you'll find that liabilities are limited to members in certain situations and that the manager is and can be personally liable, so appointing yourself as the manager may not be the best thing to do. As the manager and owing the interest in the LLC, should you become personally liable, the claim will come in the back door on you since part of your personal assets is the interest in the LLC. So what was accomplished there? There is no magic bullet for small closely held LLCs for your gross negligence or perform illegal acts.

I really wish some attorneys would chime in now and again to address issues that seem to be giving investors problems in various areas. If you value your business I hope those who have net seen an attorney and a good CPA will do so. There are just too many different issues flying around to say this is what you should do.....good luck, as always...Bill