Member Managed LLC
Which Should You Choose for your business? Member Managed or Manager Managed?
Starting a new LLC is a big endeavor. There are a number of decisions that you need to make when starting your new business that is important for your new LLC. One of those decisions that you should be making is the management structure of the LLC. There are two common types of management structures that can be used in single-member LLCs and multi-member LLCs: manager-managed LLCs and member-managed LLCs.
In this guide, I will discuss the differences between these two management structures to help you decide the best structure for your LLC.
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Which structure is best for your business?
There are several differences between managed and member-managed LLCs and considerations you should consider when picking one over the other.
Before choosing whether you will be a manager or member-managed Limited liability company, you will need to file articles of organization with your state. Although not required in every state, some states require you that choose the management structure in the articles of organization.
Once your articles of organization have been filed with your state, you will next need to create an operating agreement for your LLC. Regardless of whether you are a single-member LLC or multi-member LLC it is always advisable to create an operating agreement for your new business. If you are a single-member LLC, you may not be required to have an operating agreement, however, it can still be advisable. If you are a multi-member LLC, you will need an operating agreement to help define the relationship between the business owners.
The operating agreement
An operating agreement is a legal contract between the members. The operating agreement will cover any number of important provisions, including member vs manager management structure, who the initial LLC managers are, who is responsible for business decisions, the number of managers, who has decision-making authority over the day-to-day affairs of the business, indemnification clauses, governing law, and more.
The operating agreement will also help the members decide when winding down the business and distributing the LLC's assets. In short, operating agreements are rarely considered when business operations are good. However, when relations are going south, a well-drafted operating agreement is imperative to help ensure smooth and fair business management or the business's winding down.
Member-managed LLCs versus manager-managed LLCs
When forming an LLC, your company should decide on the way your LLC should be run. This will be defined in the LLC operating agreement. LLCs can offer two different kinds of management structures and there are pros and cons to each. In a member-managed LLC, the members, or owners of the business help manage the day-to-day operations of the business and also have the authority to vote on significant business decisions. In the manager-managed LLC, alternatively, managers are responsible for the business's daily operations, and the members are effectively passive investors.
In a manager-managed LLC, the operating agreement will list out how many managers the company can have. Additionally, members of the company can act as managers, but it isn't necessary for the business.
Manager-Managed LLC: Better in Certain Circumstances
So, when should you choose a manager-managed LLC over a member-managed one? Sometimes manager-managed is desirable when you have a limited number of owners that want to be involved in the company's daily activities. Sometimes it is the case that the company has taken passive investors or that some of the members don't want to be as involved in the LLC's management. Another instance where it can be helpful to choose a manager-managed structure is when there a too many member in the same class of ownership. With multiple members it can be difficult to make effective business decisions or manage the company in a way that everyone agrees with. Instead, it may be beneficial to designate one or two members to managed the company to help make it profitable for all owners. A final reason to choose a manager-managed structure is when the owner of the business is a foreign owner running a business in the U.S., oftentimes it can be helpful to have a U.S.-based manager to access bank accounts, manage finances, meet with customers, and do other actions to manage the business. Other circumstances for which owners of LLCs prefer managers over managers include: Delegation of leadership by smaller teams or a limited number of individuals effectively combining the various skills and interests of multiple LLC members. This will help ensure better management.
Member-Management: When the business owners want to be actively involved
Sometimes, it may be preferable to choose a member-managed LLC instead. Most commonly, a member-managed LLC can be a useful option when there are only a few members. For example, if married partners are starting a business together, it is administratively easier to choose a member-managed LLC because all business decisions will be made by either spouse.
Additionally, when you are operating as a single-member LLC it could also be an efficient choice to be a member-managed LLC because you, as the sole business owner, will run the business.
Single vs. Multi-Member LLCs
A single-member LLC sounds exactly as it is: a single owner, managing partner, and member exist, and as the sole business owner, you wear all the hats of the business. When operating as a single-member LLC, choose whatever structure you like. If you wish to remain actively involved in the company's activities, a member-managed structure for your LLC is perfectly acceptable. At the same time, you could also choose to operate as a manager-managed LLC and elect yourself as the sole manager of the company.
Sometimes, however, you don't want to run the company and instead fund the business and let someone else run it. In these circumstances, it is best to be a manager-managed LLC so you can pass the management responsibilities to a third party.
Member-managed LLCs: The More Common Choice
Most company owners choose member management, which means the members are liable for the company's daily operations. This management structure is more popular partly because most LLCs are small enterprises with limited resources. So often, it isn't financially sensible to name a third-party manager.
Is a single-member LLC member-managed or manager-managed?
As lawyers always like to say, it depends! As the company's sole owner, there is no formal requirement to create an operating agreement, so you can run the company however you see fit.
However, it is entirely up to you to choose if you want to be a member-managed vs manager-managed LLC. If you think you will take on partners in the future, it could be beneficial to elect to be a manager-managed LLC so that when the new member joins the company, you can control how involved the new member is in the company.
How do you know if an LLC is managed or manager-managed?
In almost all states, LLC members run the company as a default. However, to determine the default rule, you will need to look at the limited liability company statute first. This means that the entity will be considered member-managed unless the operating agreement states others.
Ultimately, the only way to know if a limited liability company is member-managed vs manager-managed is to look at the operating agreement. As discussed, the operating agreement is the legal document that governs the relationship between all the business owners.
Bottom Line
There is a lot of flexibility when forming a new limited liability company. Along with the flexibility comes a variety of business decisions that are important to make before filing any paperwork or putting too much money into the business.
When choosing between a member-managed vs. manager-managed LLC there is no right answer. The decision ultimately rests on a number of considerations that should always be discussed with a trusted legal advisor.
Are you ready to start your LLC? Get in touch with me today!
Now that you have started thinking about whether your business will be a member-managed vs. manager-managed LLC, it is time to start forming YOUR new business.
I am an experienced tax and business attorney that has worked with dozens of business owners in starting, running, and exiting their businesses. As your attorney, I will help you think through the different considerations needed to start a new business, prepare your operating agreements and contracts, help you file your articles of organization and more.
If you are ready to start, call me at 248-522-6272 to schedule a free 15-minute consultation to see how I can help you reach your goals.
