Who Controls the Business? Choosing the Right Entity

By Edward H. Trompke

Many businesses start with more than one owner who usually view themselves as partners. Peace and harmony usually reign while the business is being formed. Disagreements will inevitably arise. It is important to structure the business to make sure that one person has ultimate control or decision-making power over the business. Alternatively, ultimate control can be given to more than one person if the areas of authority are limited.

In an ordinary corporation, the president of the company has authority over the day-to-day operations. If the company is large enough, it may have a chief financial officer and a chief operating officer who generally report to the president or chief executive officer. All the officers report to the board of directors, who are elected by the shareholders. Because of this pyramid structure it is difficult to split authority, so the president or chief executive officer runs the company and usually has great influence with the board.

On the other hand, a limited liability company can provide an equal voice in management to all owners, who are called members. There are two forms of LLC: member-managed companies and manager-managed companies.

In member-managed LLCs, each member has an equal right to vote on all decisions unless an agreement provides for other voting, such as voting in proportion to ownership. When disagreements arise, equal voting rights can be the worst kind of management, and can (and do) result in deadlocks that continue for years.

Manager-managed LLCs, on the other hand, usually have one manager, but can have several managers who share the authority to make decisions. The authority of a single manager can be like that of a president, or can be broader, or be more in the nature of a dictator. Dictatorship is probably the most efficient form of management, where one person knows the business and the other owners do not.

Using multiple managers may not solve the problem of control. The group must still make a decision, so a general manager may be needed to resolve disputes. Or the managers can share decision-making by dividing authority between the managers according to subject to make the best use of individual skills.

There are many ways to tailor control to the skills of the people and needs of each business. The best time to deal with these issues is before the business is organized, but that is when most business owners least want to hear about the problems of the future. Be smart and plan ahead. An experienced business attorney can help you consider the alternatives and develop the form of entity that is most beneficial to your business.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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