What Is a Governor of an LLC (Board of Governors Explained)
Understanding the Governor's role is vital for entrepreneurs and business owners seeking to establish and run successful Limited Liability Companies (LLC).
After months of in-depth research and consultation with legal experts in business governance, I’ve distilled the essence of the role of a Governor in an LLC.
As an authority on company structures and management, this comprehensive article aims to clarify the Governors' definition, functions, and significance within LLC.
Quick Summary
- A governor of an LLC is an principal officer appointed to manages the business and affairs of the LLC.
- In an LLC that is member-managed, the individual serving as the governor holds the role of a member, whereas in an LLC with manager management, that same individual functions as a manager.
- An estimated 15-20% of LLCs in the U.S. opt for a board-managed governance structure, where a Governor or Board of Governors takes on decision-making responsibilities.
- In my recent venture, I actively participated in a member-managed LLC, where I served as the governor in my capacity as a member.
Who Are LLC Governors?
LLC Governors are people who manage the LLC on behalf of its members. LLC Governors have a fiduciary duty to the company and its members, meaning they must act in the best interests of the business and its members, especially when picking a registered agent.
The members typically appoint governors, and the members can remove them at any time.
Governors may be personally liable for any damage caused by their actions or inaction while in office in some states, such as Washington State.
For example, they will be liable if inaccuracies appear in the Washington Secretary of State annual report.
Legal and Fiduciary Duties of the Governor
The first legal duty of the Governor is to act in the best interest of the LLC. This means making informed decisions, conducting thorough research, and considering the potential impact of their choices on the company and its stakeholders.
The second duty is to be loyal to the LLC managed. This requires Governors to prioritize the interests of the LLC above their personal interests.
The significance of being loyal to the managed LLC became evident as I had to consistently prioritize the company's interests over my personal ones. This commitment involved making decisions that aimed at the overall well-being and success of the LLC,.
Governors must avoid conflicts of interest and refrain from engaging in any activities that could undermine the LLC's success or benefit them personally at the company's expense.
Composition and Appointment of the Governor
An LLC's management structure consists of Governors responsible for overseeing its operations and making key decisions.
Number of Governors in an LLC
Depending on the size and complexity of the LLC, the number of Governors can vary.
An LLC may often have just one Governor, especially if it is a single-member LLC.
However, multi-member LLCs may have multiple Governors, each member serving as a Governor or designating a representative to fulfill this role.
Eligibility and Qualifications for Serving as a Governor
The Federal Reserve System, often called the "Fed," has a distinct structure with Governors appointed to manage its functions [1].
In contrast, LLCs are private business entities, and state laws govern their Governor requirements. Generally, there are no specific Federal Reserve board qualifications for becoming an LLC Governor.
Eligibility and qualifications may vary by state, but most states allow any adult individual, including foreign nationals, to serve as a Governor in an LLC.
The basic eligibility requirement is that an individual must be at least 18 years old and legally capable of entering into contracts.
Previous experience in running a business or managing an LLC can also be advantageous.
Moreover, there are usually no restrictions on the Governor being a member (owner) of the LLC.
Methods of Appointing Governors
LLCs have more flexibility in appointing Governors. LLC operating agreements typically outline the process of appointing Governors, and this process can vary from one LLC to another.
Generally, LLC members have the authority to appoint Governors, either through a majority vote or as specified in the operating agreement.
Some LLCs may also allow non-members, such as outside investors or professional advisors, to serve as Governors.
Decision-Making Processes in the LLC Board of Governors
Governors play a crucial role in the decision-making process of a manager-managed LLC. They are usually involved in major business decisions, financial matters, and strategic planning.
Decisions that may require LLC Governor approval include:
- Significant investments
- Changes to the LLC's operating agreement
- Mergers
- Acquisitions
- Entering into contracts on behalf of the company
Unanimous Decisions vs. Majority Vote Decisions
The LLC's operating agreement determines whether decisions made by the Governors require a unanimous vote or can be decided by a majority.
Unanimous decisions mean that all Governors must agree to approve the decision, while a simple majority of the Governors determines majority vote decisions.
Ensuring Transparency and Fairness in Decision-Making
To maintain transparency and fairness, Governors must act in the LLC's and its members' best interest.
This involves disclosing any conflicts of interest and abstaining from voting on matters where they have a personal stake.
Additionally, keeping accurate records of board meetings and decisions ensures transparency and accountability. This allows members to review and assess the decision-making process.
Role of the Governor in Strategic Planning an LLC
Governors play a vital role in the strategic planning process of an LLC. They contribute their expertise and knowledge to develop long-term goals and objectives for the company.
By aligning the business strategy with the LLC's mission and vision, Governors help steer the company toward sustainable growth and success.
In strategic planning, Governors must also ensure that the proposed initiatives and decisions comply with the LLC's operating agreement.
Governors must also strike a balance between fulfilling the interests and expectations of LLC members while pursuing the overall objectives of the company.
"Consulting with an attorney or legal professional can help determine if a board-managed LLC is the right fit for your specific needs."
- Jon Morgan, CEO, Co-Founder and Editor-in-Chief of Venture Smarter
LLC's Governor Term and Removal
The terms of service for Governors can vary and are typically outlined in the LLC's operating agreement.
The agreement may specify the length of the term, which could be a set number of years or indefinite until the Governor resigns or is removed.
Governors can be removed from their positions through various means, depending on the LLC's operating agreement and state laws.
According to the Washington Secretary of State, you need to file an annual report within 180 days of your expiration date to modify the listed governors [2]. If beyond this timeframe, submit an amended Annual Report or Business Amendment for changes to information recorded during your formation, incorporation, or registration.
Common reasons for removal include misconduct, breach of fiduciary duties, or incapacity.
The procedures for removal are usually detailed in the operating agreement and may involve a vote by the members or a specific removal process.
Alternatively, a Governor may resign voluntarily, typically requiring a written notice to the LLC managed.
How Is an LLC Governed?
As stated by Business Law Section of the Washington State Bar Association, an LLC is governed under The LLC Act [3]. Under this law, membership interests are classified into financial or governance rights.
The right to vote to elect/appoint governors is one of the governance rights and the members' other rights as a member in the LLC except for financial rights.
A limited liability business is governed by a certificate of formation, also known as the articles of organization document and an operating agreement.
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FAQs
What Is the LLC ACT in Governance on the Entity?
The LLC Act is the law that governs LLCs. This law outlines the rules and regulations that LLCs must follow, especially when starting an LLC and other matters.
What Happens if a Governor Resigns or Needs to Be Replaced in an LLC?
If a governor resigns or needs replacement in an LLC, the process typically involves notifying members, following procedures outlined in the operating agreement and obtaining member approval if necessary. This may include appointing a new governor, amending legal documents, filing required documents with relevant authorities, and communicating the change to stakeholders.
Is the Term “LLC Governor” Commonly Used in All States, or Are There Variations in Terminology?
The term "LLC Governor" is not universally used in all states, and variations in terminology exist. Different states may use terms such as "manager," "member," or "managing member" to refer to similar roles within the governance structure of the company.
References:
- https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm
- https://www.sos.wa.gov/corporations-charities/frequently-asked-questions-faqs/governorsofficersdirectorsmembersmanagers
- https://www.wsba.org/docs/default-source/legal-community/sections/bus/llc_act_2016.pdf?sfvrsn=6a4301f1_2
