When Do You Need an LLC Resolution?

One of the reasons you formed your company as a limited liability company (LLC) was probably because LLCs don't require the same formal procedures as some other business structures. But there will be times when an LLC should still document decisions made and actions taken. The format for this kind of documentation is called an LLC resolution.

What Is an LLC Resolution?

An LLC resolution is a written record of important decisions made by members that describes an action taken by the company and confirms that members were informed about it and agreed to it.

Most states don't require you to use resolutions, but by formally recording the company's decisions on important matters you can avoid misunderstandings and disagreements down the road if memories get hazy.

We all know the saying, "Hindsight is 20/20." Resolutions can be especially useful if your LLC has two or more members because they provide a record for future reference. But even single-member LLCs might find it helpful to use resolutions because they also give courts, government entities, and outside professionals like lawyers and accountants a clearer picture of your company's operations. Resolutions can also be used to meet certain record-keeping requirements in states that have them.

When Is an LLC Resolution Used?

Your LLC's operating agreement outlines procedures for day-to-day operations like voting, distribution of profits, and company management, and it might include situations when a resolution should be used. But events can occur that require your company to change its procedures. Resolutions can be used to deal with these unforeseen circumstances like a member who decides that the business isn't a good fit and wants to leave the group or if an opportunity requiring additional capital contributions from members presents itself.

Even when an action is carried out exactly as outlined in your operating agreement, it can still be a good idea to use a resolution because it serves as a formal record that the company followed the procedures required by the agreement. If it's time to distribute profits, for instance, and you are following established procedures for making those payments, you still want a record that the payments were made.

Resolutions are typically only used for important decisions, often those that carry significant financial risk. Some common situations for using resolutions include:

Obtaining a loan or opening a bank account. Authority for conducting any financial transactions should be backed up with a resolution so there's no confusion over which members can write checks or apply for a loan. A bank might require its own documentation, sometimes called a banking resolution, that details which members can open an account and sign off on transactions.

Documenting the purchase or sale of real estate. If your LLC is a real estate investment company, you'll want to document each purchase and sale with a resolution showing the address of the property, a description, and the purchase or sale price. If your LLC sells a property and market values rise a few months later you won't have to worry about a member coming back to complain that the company should have waited to sell. Lease agreements should also be documented.

Entering a contract. If your real estate investment company decides to hire an appraisal company to prepare a portfolio for sale, a resolution will show potential buyers, attorneys, and other professionals that you managed the disposition professionally. It can also help if a member comes back later claiming the property was undervalued.

Not all contracts require a resolution. If you decide to run a year-long advertising campaign with a trade publication to attract investors and build an investment fund, you will want to back up the decision with a resolution. But placing a single ad to sell a property in the same trade paper probably wouldn't require a resolution. Even though you'll have to sign a contract in either instance, the single ad doesn't involve a lot of money or risk.

Changing the way profits are distributed. Suppose it's the end of the year, the economy has soured, and the members of your wholesale auto parts business want to put a portion of their profits back into operating capital as a cushion against discounts they think they'll have to offer next year. It wouldn't be wise to change the operating agreement because everyone expects to go back to the original profit formula when the economy improves. But a resolution would allow the company to change the rules for one year to better prepare for the economic downturn.

Adding or removing members or transferring membership rights. Suppose you have an operating agreement or a separate buyout agreement that includes procedures when members want to sell their shares and leave the LLC, but one of your members has died unexpectedly and there is no procedure for that. A resolution covering the procedure for dealing with the deceased member's shares can serve as an addition to your operating agreement in this case.

If your company doesn't have an operating agreement, it's subject to procedures set by your state, and changes to those procedures should still be backed up with a resolution.

How Do You Pass a Resolution?

Any LLC member can propose a resolution, but all members must vote on it. Typically a majority of the members is needed to pass the resolution, but each LLC may have different voting rights. Some LLCs give a different value to each member's vote based on their percentage of interest in the company.

If the resolution gets a yes vote from the required number of members, the LLC can pass the resolution. The members who approved the resolution sign the document and it becomes an official record. Members who didn't agree to the resolution are not required to sign it, but they must accept the decision.

Once a resolution is passed, it should be maintained at the principal place of business registered for your LLC where tax records and other official documents are kept.

What Should a Resolution Include?

Resolutions are usually single-page documents that include:

• the company name
• the date the resolution was passed
• a title that describes the action taken such as "resolution to open a checking account"
• details of the action taken, and
• signatures of the members who agreed to pass the resolution.

Resolutions are fairly easy to draft and you can find many templates online. Usually, LLC members are able to draft these resolutions on their own from scratch or using these templates. You can even take from templates for corporate resolutions. In exceptional cases that involve complex business issues, you might find it helpful to reach out to a business attorney for help in drafting or reviewing your resolution.