When structuring a limited liability company (LLC), one of the critical decisions that must be made is how the company will be managed.
Two standard options are member-managed and manager-managed LLCs.
A member-managed LLC is one in which the members (owners) of the company manage the day-to-day operations and make decisions collectively. This means that all members have an equal say in the company’s management and are personally responsible for its actions.
On the other hand, a manager-managed LLC is one in which the members appoint one or more managers to make decisions and manage the company’s operations on their behalf. The manager of a manager-managed LLC is not necessarily a member of the LLC, and the manager will have a contract with the LLC outlining the terms of their management.
This post will explore the definitions, similarities, and differences between these two types of LLCs to help you decide which is right for your business.
Table of contents
What Is A Member-Managed LLC?
A member-managed LLC involves its members (owners) in business activities, converting each of them into an “agent” who can formally represent the company. Administrative duties and authority don’t need to be distributed equitably under this arrangement.
However, it can be designed to prevent members from joining as passive investors. In most states, member management is the default structural designation; thus, if it’s not stated in an LLC’s operating agreement or articles of organization, all members may be regarded as managers.
You may want to see General Manager Vs. Operations Manager: Differences & Similarities
Who Are Member-Managed LLCs Best For?
Member management works best for LLCs with many investors who want to keep things organized and take ownership of business operations. It’s no wonder that member management is a common choice for LLC owners since the LLC structure is famous in the first place for its simplicity and the level of control it offers.
The usual responsibility allocation in member management is comparable to that of a partnership, which has essential distinctions in liability but is also a standard option for small enterprises with fewer actively involved owners.
Typically, member management implies that to be an investor, a person must be competent to perform a direct managerial function; however, this isn’t always the case.
This benefits some businesses since it limits who can make decisions to those with a specific level of personal involvement and engagement. A firm can be set up in various ways, but more complicated structures come with more risk and complexity. For advice on how to form your company most effectively, speak with a lawyer.
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Benefits of Member-Managed LLCs
A member-managed LLC is the standard type of LLC in most states. This structure is typical, especially for small companies with few employees. Your startup will benefit from operating as a member-managed LLC if you want to ensure each member has a meaningful say in how the company is run.
Pros of member-managed LLC
- Every member has a voice in management choices.
- More straightforward structure, especially for small businesses.
- An excellent option for stores and other physical establishments.
Cons of member-managed LLC
- The management of the LLC might be a full-time job, which prevents owners from making strategic choices.
- It is challenging to attract investment capital because of this structure.
What Happens If I Choose Member-Managed LLC For My Business?
Suppose you decide to run your LLC through manager management. In that case, there will probably be a legal necessity that you make this decision apparent in your LLC’s organizational documents. This is usually included in your operating agreement or the articles of organization that you submit to the state.
You should include in your operating agreement, in addition to the items for members that were already mentioned, information on the authority and duties that the management, or managers, will have. Will managers, for instance, have sole discretion over all employment choices? What about the purchasing of equipment? Documenting the scope of the manager’s—or managers’—authority can prevent future issues, just like the member provisions.
What Is A Manager-Managed LLC?
A manager-managed LLC gives chosen managers operational control. Although they don’t operate as the company’s managers or are regarded as agents, LLC members can frequently vote on essential matters. Decentralized management is sometimes less viable for LLCs with many members than combining or “centralizing” administrative functions and authority.
This structure can also be effective for LLCs with a few members; it all depends on personal desire. There is virtually no restriction on how many managers an LLC can have, but there are typically fewer managers than members in practice.
Who Are Manager-Managed LLCs Best For?
A manager-managed LLC permits passive investors, just like a corporation. Due to this, the LLC can accept members who don’t wish to be involved in day-to-day operations. A manager or manager in this structure plays a role not too dissimilar from a corporate director. For LLCs that value their potential to draw in a variety of investors, manager management is preferred.
Businesses with members who lack management or business industry experience can consider a manager-management structure. Manager-managed LLCs will likely find it simpler to attract qualified management because designated managers don’t have to be current LLC members. Members of manager-managed LLCs are often better suited if they already have a job and are not interested in committing time to the firm.
Benefits of Manager-Managed LLCs
Although less prevalent, a manager-managed LLC can be advantageous if you want your firm to operate more like a corporation. When an LLC is managed by management, its owners exercise their power by casting ballots on essential business decisions rather than actively participating in the company’s daily operations.
A manager-managed can be advantageous for your startup in the following situations:
1. Large Size
A manager-managed LLC, however less common, can be helpful if you want your business to run more like a corporation. When an LLC is run by management, its owners don’t actively participate in its day-to-day operations; instead, they vote on crucial business decisions.
2. Desired Anonymity
Members of a manager-managed LLC must be listed within the LLC operating agreements.
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3. Passive Ownership
You might occasionally have members who aren’t eager to participate actively in the company. A manager-managed LLC enables the appointment of one or more managers to oversee the company’s operations, freeing up the other members to play a more passive role.
Pros of manager-managed LLC
- It makes it easy for investors to invest passively in the business.
- It makes it more accessible for large LLCs to operate quickly.
- Permits managers with active control to act quickly without needing the approval of all owners.
- It reduces the number of decision-makers and avoids the “too many cooks” problem.
Cons of manager-managed LLC
- All the owners don’t get to participate in management decisions.
- The operating agreement must be careful to detail the manager’s authority.
- A qualified manager might not have the same understanding of the company as the owners.
- Smaller enterprises may struggle because competent managers need to make a living wage.
When Is A Manager Managed LLC Ideal?
A manager-management organization is preferable when certain members merely choose to participate as passive investors in the company. When the LLC assigns management duties to one or more other members, these owners frequently feel better at ease (or nonmembers).
LLC owners may also favor a manager-management structure in the following circumstances:
- When some of your members are not particularly adept at management.
- When your business or ownership is too huge, diverse, or complex to effectively allow for sharing management among all members.
- Or a combination of these scenarios.
The diverse abilities and interests of numerous LLC members can be effectively balanced by giving management authority to a smaller group of persons or just one person. Additionally, it can guarantee that the company is managed more skillfully.
You can employ a nonmember to serve as manager, even though LLCs that appoint managers frequently rely on one or more of their members to do so.
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What Are The Differences Between A Member-Managed vs. Manager-Managed LLCs?
The members or owners of a member-managed LLC are liable for the business’s day-to-day operations. In manager-managed LLCs, only a select group of designated members (or outside appointments, such as a board of directors) control business operations.
The main distinction between the two is that the corporate structure of manager-managed LLCs can include passive investors. All owners in LLCs that are member-managed have a say in proportion to their ownership stake. Since every member of a member-managed LLC can participate in every decision, not only important ones that require a vote, member-managed LLCs typically require each investor to serve a far more active role than manager-managed LLCs.
The Role of LLC Operating Agreements
Operating agreements for LLCs are essential to their management and functioning. LLC operating agreements specify the management structure to be utilized and the degree of control and decision-making authority the managers and members have. This is because these agreements aid in defining the duties of the managers and members.
Imagine that you omit to specify these functions and judgments in the LLC operating agreement. In that instance, state law will be applied by default, which may unintentionally give certain members control or expose members to liabilities. By creating a comprehensive LLC operating agreement that addresses all pertinent issues, a startup lawyer can assist you in avoiding this circumstance.
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How Do I Create An Operating Agreement?
Writing an operating agreement from scratch without a legal background is not recommended. Instead, follow a free template or step-by-step instructions found online through law libraries and legal help websites, or visit sites with business formation resources such as Legal Zoom or RocketLawyer. They provide a wide range of services targeted explicitly towards LLCs, such as interactive tools that generate operating agreements that are only loosely standardized.
LLCs with particular requirements, unusual complexity, or many members should consider engaging legal counsel. Even though this is the most expensive option, creating an LLC is still less expensive than starting a corporation. Spending money to secure legal protections is usually a good investment.
READ ALSO: LLC Member Vs Manager: Definitions, Similarities & Differences
Should My LLC Be Member-Managed Or Manager-Managed?
The choice between a member vs. manager-managed LLC depends on multiple factors, including:
- The number of owners
- The size of the business
- Whether there are silent partners who won’t be participating in the company’s daily operations
- The nature of business
- Whether you need to be able to make fast decisions
- How much liability protection do members require
Keep in mind that the member-managed vs. manager-managed dichotomy is misleadingly straightforward. In actuality, incorporators must make far more difficult choices regarding the management structure of their LLCs, which frequently necessitate specialized legal counsel.
For instance, you could establish separate voting rights to give some owners a greater voice than others. This can be achieved by forming voting and non-voting interests or demanding a supermajority or unanimous vote for particular business decisions.
Alternatively, you could need to restrict manager power by asking for member consent for particular operations, including mergers and acquisitions or LLC liquidation.
FAQs On Member Managed Vs. Manager Managed
No, normally there is no cap on the number of managers you can designate.
No, not always. Existing members and nonmembers can be named managers in an LLC that managers control.
The members or owners of a member-managed LLC are liable for the business’s day-to-day operations. While certain designated members (or even outside appointees — for example, a board of directors) run the operations of manager-managed LLCs.
No, an attorney must not file and register an LLC with any state.
Conclusion
As you can see, a member-managed LLC and a manager-managed LLC differ significantly in several ways. Your daily decision-making will be significantly impacted by the option you choose.
References
- forbes.com – Member-managed LLC Vs. Manager-managed LLC: Which Structure Best Fits Your Business?
- nerdwallet.com – Member-Managed LLC vs. Manager-Managed LLC: Which Should You Choose?
- priorilegal.com – Member-Managed vs. Manager-Managed LLCs
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