LLC decision making/governance

LLC decision making/governance

My family is a 28% owners of shares in a real estate limited partnership that is now an LLC. Can some of our partners bind the LLC in a home equity loan without our consent if the underlying partnership agreement requires unanimity on all partnership decisions?


If the entity you own 28% of was a limited partnership and converted to an LLC (limited liability company) you should have had the LLC attorney update the documents from the old partnership documents to agreements designed for an LLC called an operating agreement. If you have an perating agreement then you need to review it to determine what the management/approval structure is. If it is a manager managed LLC (i.e., persons are esignated as authority to manage the LLC) the in fact some of the "partners" might be able to authorize a transaction if they are managers (but in an LLC the owners are called "members" not "partners"). If the LLC is not manager managed, then it would be governed (managed) by the members as owners. In that case the percentage of members that would be required to approve the particular action you question might be specified in the operating agreement (that is the governing document for an LLC analogous to a shareholders agreement for a corporation). Depending on the terms of the operating agreement a percentage (not all) of the members may be authorized to approve a particular action.

Starting with the operating agreement is your first step because most state LLC statutes (laws) are written in a manner that is referred to as a "default" law.....if the operating agreement is silent, then state law applies. Thus, for many issues, perhaps the one you question, the terms (provisions; language) of the operating agreement will be controlling (governing) if it addresses the issue, regardless of state law.

If the operating agreement does not address the issue you raise, then state law may fill in the gaps and govern. In such cases you would have to review the state law governing the LLC (the operating agreement may designate a state law as governing). In some instances the state law provision that applies may be mandatory, and not only as a default in case the operating agreement is silent. So you really need to review state law to confirm.

Has the home equity line been properly documented, secured and handled?

So now you've reviewed the operating agreement and state law (and hopefully enlisted a corporate or business attorney in the appropriate state), there still may be another legal concern. How can an LLC make a home equity loan? Is that an appropriate investment? Was it for a member of the LLC or a relative? This type of transaction, if for a related party, may be inappropriate for the LLC to engage in regardless of the general governance and control provisions in the operating agreement or state law. Further if it is a loan to a related party it could raise a myriad of tax issues. Is the interest rate sufficient? Is it documented? And so on.

There are a number of issues and layers of issues to address to resolve your question. Given the complexity you'd be best off securing legal counsel.

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