Calibrating Control in LLC Operating Agreements: Manager Authority, Member Rights & Major Decisions
The architecture of control within a limited liability company (LLC) is often more critical than the capital structure. Whether you’re structuring a family-held restaurant group, a multi-investor development project, or a high-growth startup, how you allocate decision-making authority between the Manager(s) and Members can determine not just efficiency—but survivability.
Operating Agreements allow tremendous flexibility, but that freedom must be exercised with clarity and foresight. This post breaks down the three primary levels of authority—Manager Powers, Member Approvals, and Major Decisions—and the consequences of poorly defined boundaries between them.
Three-Tier Governance Framework
| Authority Level | Typical Actions Covered | Approval Standard | Purpose |
|---|---|---|---|
| Manager Authority | Day-to-day operations, signing contracts, managing staff, executing budget | Unilateral (subject to fiduciary duties) | Enables operational efficiency and managerial discretion |
| Member Approval | Tax elections, appointing a new Manager, approving related-party transactions | Majority or Class Vote (e.g., 51% of Units) | Offers Members meaningful input on core governance matters |
| Major Decisions | Issuing new Units, capital calls, mergers, major asset sales, changing the business purpose | Supermajority (e.g., 75%) or Unanimous Approval | Safeguards Members from dilution or fundamental shifts in the company |
Where Operating Agreements Often Fail
Many Operating Agreements oversimplify this structure—or worse, leave gaps that lead to confusion and costly disputes. Consider these common pitfalls:
- “Manager-managed” ≠ unchecked power. Just because a Manager has day-to-day control doesn’t mean they should decide whether to admit new Members or borrow $500,000.
- Supermajority thresholds without clarity on what’s “major.” One party’s idea of a routine lease can be another’s material asset disposition.
- No escalation path for deadlocks. Unanimous approval may sound protective—until you have a disgruntled 10% Member holding the business hostage.
Examples of Calibrated Approaches
Depending on the nature of the business, the Operating Agreement might allocate powers as follows:
Real Estate JV
- Manager handles routine vendor contracts and tenant relationships.
- Capital calls and property sales require a certain % (such as 75%) Member approval.
- Distributions follow a defined IRR waterfall, not at Manager’s discretion.
Hospitality Group
- Manager hires staff but cannot hire or fire Key Personnel (e.g., Head Chef, GM) without Unanimous Member Approval.
- Any expansion, franchising, or rebranding requires Supermajority Approval (however that may be defined in the particular Operating Agreement).
- Members retain ROFR and drag-along rights tied to strategic exits.
Tips to consider
- Be specific. “Major Decisions” should be itemized (ideally 10–15 key events), not inferred.
- Define thresholds based on Units, not headcount. Especially important when ownership is not evenly split.
- Clarify whether Member votes are by capital contributions, Units, or classes.
- Add procedural safeguards. For example, hiring Key Personnel might require written consent or an in-person meeting.
- Include fail-safes. For instance, allow Supermajority to override a Manager who fails to act within a reasonable period.
Final Thought
In any business, conflicts don’t just stem from outcomes—they stem from unclear expectations. A well-structured Operating Agreement creates a decision-making architecture that protects the company from both overreach and paralysis. It enables momentum without sacrificing accountability.
If you’re drafting or renegotiating an Operating Agreement, don’t default to boilerplate governance provisions. Treat your control structure like your cap table: essential, negotiated, and built to last.
