Difference Between a Member-Managed and a Manager-Managed LLC
You’ve heard us talk before about Limited Liability Companies (LLCs). LLCs are the most common entity structure for small businesses throughout the country. We’ve said before that this is because LLCs are:
Subject to fewer restrictions
Require less reporting
than corporations. Despite LLCs’ reputation for being relatively user-friendly, there are a few quirks that business owners need to know about before diving into forming an LLC. First, let’s do a quick review.
Limited Liability Companies, Reviewed
The LLC is a flexible entity structure that provides liability protection for business owners while avoiding many of the restrictions placed upon corporations. LLC owners are called “members,” and there can be an unlimited number of members. Members may be individuals, corporations, or other LLCs. Depending on how many members own an LLC and how the company is structured, LLCs can be taxed in a variety of ways.
Just like ownership, LLC management can be done in a number of ways: member-managed or manager-managed.
What is the Difference Between Member-Managed and Manager-Managed?
LLCs, like any other business, must be managed. Someone, whether an owner of the LLC or an employee, must conduct the day-to-day operations of that business. In the LLC world, this difference is referred to as “member-managed” or “manager-managed.” Although it may seem like this designation is an internal operations matter, many states actually require that you indicate this structure in your Articles of Organization. That’s why it’s important to understand the difference and know what you plan to do before creating an LLC.
A member-managed LLC is one in which the members (remember, that’s just a fancy word for owners) all participate in the decision-making process for the LLC. This is a very common way to go for many small businesses. If you own an LLC alone or with a small number of partners, it makes sense that each of you would want to be involved in the operation of the business. Member-managers each have the authority to make decisions on behalf of the company and act as agents for the LLC. If there is more than one member, business decisions must be voted upon and contracts should be approved by a majority of the members. In many states, member-management is the default, so if you do not select a management structure, the state will assume that the LLC is member-managed.
A manager-managed LLC, on the other hand, is not operated by all members. Either the members choose one or more members to manage the LLC or the members may hire a professional manager. The members give over authority of the company to the selected managers, who become the company’s agents.
Whether members or managers, the chosen management of an LLC acts much like the board of directors of a corporation. They make decisions, act as agents for the LLC, and can sign contracts on the LLC’s behalf.
Why Would Some LLCs Prefer to be Manager-Managed?
There are three main circumstances in which LLCs tend to choose the manager-management path:
There are members who prefer a more passive role.
Often, LLCs are co-owned by “silent partners” or investors. These individuals or companies hold an ownership stake in the LLC but are not involved in the management of the company. If all members prefer to take on a passive role, the LLC can hire a professional manager. If some members prefer to be active while others are passive, the active members will be considered managers, and the LLC will still be manager-managed.
2. The LLC is owned by a large number of members.
If an LLC has many members, it might not be practical for all to gather regularly to make decisions about business operations. Also, the larger the LLC, the more work it will be to manage the company. Again, the membership will have the option to choose a smaller number of members to take on management or to hire an outside manager.
3. Some of the members are not ready or willing to take on management duties.
In some cases, the LLC may have members who are not equipped to perform management duties. A good example may be individuals who do not excel at management or younger family members of the members who are being groomed to take on more active roles in the future. Although these members hold an ownership stake in the LLC, they will not be involved in the day-to-day decision-making.
Make Sure Your LLC’s Choice is Formalized
No matter what you choose -- member-managed or manager-managed -- this decision needs to be formalized. As mentioned earlier, your state may require that you declare your management structure in the Articles of Organization. However, this simple declaration is not enough. No matter the structure or management style of your LLC, the operations of the company should be spelled out in an LLC Operating Agreement. An Operating Agreement is an internal document that describes how the LLC should be run and what to do when conflicts arise. Among many other clauses, this document should outline how the LLC will be managed, as well as how managers will be chosen and changed.
Reach Out to an Experienced Business Lawyer for Help
If you are considering starting an LLC, or if you own one already and are not familiar with this aspect of LLC management, reach out to an experienced business attorney for help. At Enterprise Esquire, we have years of expertise helping LLCs structure and prepare for whatever lies ahead. Don’t wait! Failing to structure a business properly from the beginning can lead to serious consequences down the road. Schedule a FREE consultation today.