What Is a Management Agreement for Your LLC?

LLCs can work with other businesses to expand their operations. These partnerships can be formalized through contracts such as management agreements. Businesses in different industries, from real estate LLCs to hospitality businesses and franchises, use these documents to delegate operational control while maintaining ownership.

Today, we’ll explain what a management agreement is, what it should contain, and how to create one for your LLC and its partners.

Key Takeaways

• A management agreement is a legal contract signed by an LLC and another business.
• Your company can enter an agreement for managing employees, business operations, or owned property.
• Management contracts can include sections about manager appointments, specific services to be performed, business obligations, legal liabilities, and other important information.
• Having a management contract is key to efficient and well-executed operations.
• You must take several steps when writing management contracts, including consulting a lawyer.

What is a Management Agreement?

A management agreement is a legally binding contract signed by a borrower and a manager. This document outlines the arrangement between both parties that allows business operations to continue.

Company owners generally sign management agreements for employees. But in some cases, businesses may handle an LLC’s operations under these contracts. This arrangement can last for a set period.

Where Are Management Agreements Used?

Management agreements are used in industries and businesses such as real estate, hotels, and resorts. Sometimes, franchise businesses can sign this contract to ensure smooth operations across locations.

Learn More About Franchises From NCH

What’s Included in a Management Agreement?

A management agreement typically provides information about the following:

• Manager appointments - Management agreements name a designated manager to emphasize their importance.
• Services to be performed - The managing company lists and describes the specific services that they’ll provide during the management period.
• Business obligations - Management contracts can also contain certain rules, regulations, and obligations applicable to the managing company.
• Other agreements and provisions - These clauses show the managing business how to conduct their operations.
• Liability and indemnity clauses - Some management agreements may contain clauses that address potential risks and protection against legal claims.

You may also see information about general and organizational activities, property locations, compensation, and legal backing in management contracts. The details included in these documents vary by business and arrangement.

Why Should Your LLC Have a Management Agreement?

If your LLC is working with a managing firm, it should have a management agreement for efficient and well-executed operations. This contract delegates specific responsibilities to professionals outside of your company, ensuring excellent service throughout the management period.

Furthermore, a management agreement can protect your LLC from potential mismanagement or legal disputes. As we’ve mentioned earlier, your contract can include clauses discussing legal risks and liability protection.

Common Types of Management Agreements

Management agreements come in different types, including:

• Management and operations agreements - Under these contracts, an external firm manages another company’s operations.
• Property management agreements - Property management agreements are signed by a management company and a property owner. They allow the manager to handle affairs related to the owner’s property, such as rental collections, maintenance, and tenant relations.
• Management services agreements - This type of management agreement outlines the managing firm’s services to the other party.

How to Draft a Management Agreement for Your LLC

To draft a management agreement for your LLC, here’s what you need to do.

Consult a Lawyer

As you write a management agreement, work with a trusted lawyer to determine what you should include in the document. You’ll also need an attorney to review the finalized agreement before signing it. Your legal counsel should help you ensure that:

• All terms are clearly defined and mutually agreed upon.
• The manager exercises an adequate level of authority under the agreement.
• The termination clauses protect the owner’s rights if the management firm doesn’t meet the established standards for performance.
• The agreement outlines quantifiable and verifiable performance metrics.

Name & Describe the Parties Involved

Businesses in the same industry or with different services usually enter management agreements. Your contract should identify and describe the parties who will sign it, so both companies gain enough knowledge about each other.

Specify the Agreement’s Duration

Management agreements also contain information about their duration. Generally, they state when the managing firm starts and ends their partnership with your business. These important dates should be included in your management contract.

Determine Applicable Laws

Beyond discussing essential management agreement clauses and reviewing the final document, a lawyer can help you determine the laws that apply to your contract.

Certain federal and state regulations govern management agreements. For example, your home state may require your LLC and its managing firm to submit documents relevant to your arrangement. Federal and state authorities provide information about these requirements online and in printed publications.

Align the Contract with Your Operating Agreement

Your management agreement must complement and support your LLC's operating agreement instead of contradicting its provisions. This is especially important if the former has clauses detailing legal risks and liability protection.

Moreover, the operating agreement plays a crucial role in preventing lawsuits with detailed information about ownership shares, decision-makers, and member responsibilities. All three can be included in your management agreement to help the managing firm understand your LLC’s operations.

Bonus Tip

Learn what an operating agreement is from NCH’s 60 Second Business Tip series.

Specify Remedies for Potential Contract Violations

Consider listing and describing remedies for potential violations in your management agreement as well. For example, the document may state that the parties involved can enter mediation or allow one party to suspend the arrangement until further notice.

Your management agreement should also specify compensation for contract violations. Discuss this with your LLC’s managing firm before finalizing and signing the contract.

Sign the Finalized Agreement

Once your management agreement is drafted and reviewed, it should be signed by both of the involved parties. Sign the contract with a lawyer present to prevent potential conflicts or litigation.

Frequently Asked Questions

How is a management agreement different from an operating agreement?

A management agreement formalizes a partnership between an LLC and a managing firm. It can be written to allow one party to manage an individual or another business.

Conversely, an operating agreement outlines how an LLC operates. It describes aspects such as the company’s management structure and ownership.

Who should sign a management agreement?

The parties that should sign a management agreement depends on the type of contract.

For a management and operations agreement, an LLC and its managing partner should sign the agreement. A property management agreement requires the signatures of a property owner and a managing firm.

Can management agreements be modified after they’re signed?

Yes, management agreements can be modified after they’re signed. However, any amendments must be approved by all of your LLC’s members and the management firm. The original agreement should outline amendment procedures to ensure that all parties understand the proposed changes.

What happens if a party violates a management agreement?

If a party violates a management agreement, it can face various consequences. These vary depending on how severe the violation is and what the agreement specifies.

Minor violations may cause warnings or corrective action. Meanwhile, serious violations may lead to immediate contract termination, financial penalties, or legal action to recover damages.

Can management agreements be terminated early?

Yes, management agreements can be terminated early. Your LLC can enforce this rule if its contract allows it.

Alternatively, the company can terminate the agreement if it gains mutual consent from its members and the other parties.

Why should I have management contracts reviewed by a lawyer?

A lawyer will review management contracts to ensure that they:

• Adhere to applicable federal and state laws.
• Align with your LLC’s operating agreement.
• Include important clauses for liability protection and dispute resolution.

Most importantly, professional legal review can help reduce the risk of costly mistakes or unenforceable clauses.

How long do management agreements last?

Management agreements can last two to five years. Your LLC can choose to renew the contract before it expires or end it at any time.

Do note that short-term contracts may need to be negotiated. Long-term management agreements offer stability but may become outdated.

When should management agreements be reviewed?

Management agreements should be reviewed when needed. You can review your current contract before renewing it or when your operations or applicable laws change.

Expert Tips From NCH

1. Schedule regular reviews of your management contract. It’s especially important as your LLC’s operations change.

2. Ensure that your designated manager uses the appropriate level of authority under your management agreement. Describe the decisions that LLC owners must approve in the document to prevent problems.

3. Consult a business or contract law attorney before signing a management contract. Their advice will help you protect your interests.

Formalize Partnerships with a Management Agreement

When you adhere to a well-drafted management agreement, you can maintain control over your LLC’s ownership, minimize risk, and make business operations more efficient. That’s why it pays to identify the most important clauses, include them in your contract, and have the document reviewed by a legal expert. NCH is here to help you write a comprehensive management agreement or understand its terms with its extensive expertise.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.