Do state statutes require unanimous consent for LLC manager salary changes without an operating agreement?

Do state statutes require unanimous consent for LLC manager salary changes without an operating agreement?

Yes. In the absence of an operating agreement, most state LLC statutes default to a requirement of unanimous member consent for any action that falls outside the ordinary course of business, which includes setting or increasing manager compensation. Without a written agreement, you are bound by these restrictive statutory defaults.

The Statutory Default Trap

When an LLC is formed without an operating agreement, the entity is governed entirely by the default rules of the state of formation (e.g., the Delaware Limited Liability Company Act or the Revised Uniform Limited Liability Company Act). These statutes are designed to protect minority members by preventing managers from unilaterally enriching themselves.

Why Compensation is Considered Extraordinary

State laws generally categorize business activities into two buckets: ordinary and extraordinary. Ordinary activities include day-to-day operations like paying utility bills or purchasing office supplies. Extraordinary activities include:

• Amending the Articles of Organization.
• Admitting new members.
• Selling substantially all of the company's assets.
• Setting or modifying manager compensation.

Because compensation directly impacts the profit distribution of the members, courts consistently view salary changes as a conflict of interest. Without an operating agreement to override the statute, the law assumes that any change to a manager's pay requires the affirmative vote of every member.

Key takeaway: If your LLC lacks an operating agreement, you are operating under a "unanimous consent" default. Any manager who unilaterally raises their own salary is likely committing a breach of fiduciary duty.

Action Item: Audit your current records to see if a written compensation policy exists. If not, stop all salary adjustments until a formal resolution is signed by all members.

Comparison of Governance Models

The Risks of Ignoring Statutory Requirements

Operating without an operating agreement creates significant legal exposure. When a manager unilaterally sets their salary, they invite several specific legal risks:

• Breach of Fiduciary Duty: Managers owe a duty of loyalty to the LLC. Self-dealing without disclosure and consent is a primary trigger for derivative lawsuits.
• Personal Liability: If a court finds the salary increase was unauthorized, the manager may be personally liable to repay the "excess" compensation to the company.
• Tax Reclassification: The IRS may scrutinize "unreasonable" compensation, especially if it is not supported by a formal board resolution or agreement, potentially reclassifying the payments as taxable distributions rather than deductible business expenses.
• Member Dissension: Minority members can use the lack of unanimous consent as leverage to force a buyout or dissolution of the company.

The Burden of Proof

In a legal dispute, the burden of proof rests on the manager to demonstrate that the compensation was fair and authorized. Without a written agreement, the manager has no "safe harbor" to point to, making it nearly impossible to defend against claims of self-dealing.

Action Item: If you are a manager, document every compensation decision in a written resolution signed by all members, even if you do not have a full operating agreement yet.

How to Rectify the Situation

If your LLC is currently operating without a formal agreement, you should take immediate steps to formalize your governance structure. Relying on state default statutes is a recipe for litigation.

1. Draft an Operating Agreement: Work with legal counsel to draft an agreement that explicitly outlines the manager's compensation, including how and when it can be adjusted.
2. Define the Approval Process: Specify whether salary changes require a simple majority, a supermajority, or unanimous consent.
3. Ratify Past Actions: If salary changes have already occurred, have all members sign a "Ratification of Prior Acts" to retroactively approve the compensation.
4. Formalize the Compensation Policy: Attach a schedule of compensation to the operating agreement to provide transparency to all members.

Key takeaway: A retroactive ratification can cure many past governance defects, but it requires the cooperation of all members. Do not wait for a dispute to arise before seeking these signatures.

Action Item: Schedule a meeting with all members to discuss the adoption of an operating agreement. Transparency is the best defense against future litigation.

Leveraging Technology for Compliance

Managing the complexities of LLC governance and compensation structures is difficult without the right tools. TermScore can automatically analyze your existing contracts and organizational documents to identify gaps in your governance, highlight missing clauses regarding manager compensation, and ensure your business remains compliant with state-specific requirements. By using AI to flag these risks early, you can avoid the costly litigation that arises from ambiguous or missing operating agreements.