Member-Managed LLCs vs. Manager-Managed LLCs? What’s the Difference?
Managing a limited liability company (LLC) can either be done through a member managed system or a manager managed system.
Both have their respective differences with one form of management more applicable for certain situations than the other.
When organizing the formation of a limited liability company, the decision on how the LLC will be managed has to be made with two management structures to choose from.
Business owners can decide to have a member managed limited liability company where every owner, known as members, are involved in conducting the business or they can opt for a manager managed limited liability company where only an elected few are accountable for conducting the business with these elected few spanning from members that have been appointed to manage, nonmember qualified individuals or a combination of nonmembers and members that are tasked with the duty to operate the business.
The members in an LLC that do not manage the business in a manager managed limited liability company function as passive investors who do not concern themselves with the daily running of the business.
Let’s take a deeper dive into these two management structures.
Member managed limited liability companies are the more common option
In most cases, those who choose to establish a limited liability company business entity also choose to have it managed by its members.
A member managed LLC is the more common choice as the majority of limited liability companies formed are actually small businesses with resources that are more limited than businesses that operate on a larger scale therefore, they do not currently need a dedicated management level to run their businesses for them.
Limited liability companies also do not have an organizational structure that is as streamlined as a corporation so LLC’s do not tend to have a board of directors or officers.
All these factors combined are the reason why most limited liability companies formed are under a member management.
Since those who typically choose to run a limited liability company are those that prefer to be hands on with their business, they do not mind being directly concerned and involved with the handling and administration of their company.
The member management structure for a limited liability company is for you if you would like to be in charge of your own business by being the one to actively provides customer services, take orders, make products and sell the products or services offered.
To illustrate this further, imagine that your limited liability company is a bakery and each of your LLC’s members would want to have a direct role in the business.
The LLC’s members are the ones that hire employees, craft recipes, bake goods, and manage the opening and closing of the shop.
In that kind of scenario, a member managed limited liability company would be the go to choice for you and the rest of the members of the LLC.
In numerous states, limited liability companies are classified as member managed by default in accordance with the state’s laws so if a management structure is not designated for your LLC in either its operating agreement or in its formation documents, then your limited liability company will automatically be elected as an organization that is member managed.
Manager management is better in certain circumstances
There will be situations where a manager management structure would be more appropriate for a limited liability company.
The most typical scenario of this is when certain members of the LLC would rather be passive investors only.
These limited liability company members tend to be comfortable with the delegation of their business’ management to other members or nonmembers – whether that is one or more than one who are better qualified to run their business than they are.
Other situations that would call for a manager managed structure is when the company is too complex, diverse and large so the division of management is not going to be efficient anymore and when there are members in the limited liability company that are not skilled or knowledgeable when it comes to the subject of business management.
There are times when both of the aforementioned situations happen simultaneously.
In cases like this, having management be delegated to an appointed individual or a select group of individuals can be an effective means to balance, complement and supplement the various interests and skills of different limited liability company members.
Having a manager managed structure can advance the proficient management of an LLC.
It is common for limited liability companies to appoint one or more of their own members as their LLC’s managers though it is always possible to have an external party that is not a member of the LLC to manage the business.
Document your choice
Business owners who choose to designate their management structure as member managed may not be obligated to officially document their decision although there are still several states that would ask for the statement that declares whether the limited liability company is member managed or manager managed on the LLC’s articles of organization – which are filed upon the formation of the limited liability company.
Nonetheless, every limited liability company would benefit from having an operating agreement drafted to lay out the basic responsibilities and rights of every member and manager if present.
In a limited liability company that is member managed, its operating agreement would detail matters like the voting rights of the members, provisions on buy outs, added capital contribution, and other terms or conditions on vital operating and management issues that concern the owners.
The lack of an operating agreement puts you at risk of arguments and disagreements that are challenging to navigate through as there were no explicitly stated arrangements in the first place to prevent these misunderstandings from happening or being easily mediated.
Choosing a manager management structure for your limited liability company would most likely legally require you to declare this decision on your LLC’s documents of organization.
Where this choice is usually found is in a limited liability company’s operating agreement or its articles of organization that has to be filed with the state.
On top of the usual details found or included in an operating agreement, it is advisable to have the operating agreement also address the scope of authority and responsibility that a manager or managers of the LLC will have.
An example of what to include is whether managers will have the sole authority for every hiring decision made.
Similar to member provisions, having the scope of the manager’s control can aid in steering clear of disputes or problems in the future.
If a limited liability company does not produce its own operating agreement, the regulations of the state on LLCs will be implemented which may not be what is best or relevant to the business’ internal organization and operations.
It is recommended to have an operating agreement that is specifically made and tailored to your limited liability company and its individual needs and circumstances.
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