The Differences Between Member-Managed and Manager-Managed LLCs

Which Management Structure Works Best for Your Small Business LLC?

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An LLC, also referred to as a limited liability company, consists of members who are also owners of the business. The LLC can be either a single-member LLC or multi-member LLC. When forming an LLC, you must decide whether it will be member-managed or manager-managed. This article will help you understand the difference and which management form best meets your small business needs.

What Is a Member-Managed LLC?

A member-managed LLC is where all of the members (owners) have the ability to bind the LLC into contracts and agreements, as well as take part in the day-to-day operations and business decisions. All members have a say in the decision-making process, and a majority of the members must approve of certain decisions, such as contracts and loan agreements. This is because an LLC does not have officers or a board of directors.

In most states, if you don’t provide information on a manager when registering your LLC, the LLC is by default member-managed. If your business is a single-member LLC, then you, the single member, are the manager as well as owner.

If your small business makes and sells products, or offers services, the member-managed LLC is probably the best choice for you so you can oversee the daily operations of your business while also having oversight and decision-making authority. If, for example, you are a graphic designer who opens a design LLC, you’ll want to be the decision-maker about your marketing efforts, needed equipment, and any employees or contractors hired.

Most small businesses choose to be member-managed because it gives them the freedom to run the business in the manner they choose.

What Is a Manager-Managed LLC?

In some situations, a manager-management structure may be preferable. If you want your LLC to be manager-managed, you appoint one or more managers to oversee the operations of the business. If this is done, then only the managers have the decision-making authority to bind the LLC to contracts and other agreements.

The manager can be a member of the LLC, an individual who is not a member of the LLC, another LLC, or even a corporation.

Be sure to understand your state’s rules though, since some states prevent certain entities from becoming LLC managers.

Why choose a manager-managed LLC? The most common example is when some members only want to be passive investors in the business. These owners often feel more comfortable if the LLC delegates management responsibilities. Other reasons include:

  • An LLC being too large and complex to have members actively manage it.
  • An LLC having investors who don’t have the knowledge or ability to effectively manage a business.
  • An LLC with members who might not be able to agree on important business decisions and who need a manager to make these decisions to prevent disagreements between members.

File the Correct Paperwork

Whichever type you choose, be sure to document your LLCs management structure correctly. If you choose member-management, you may not be required to formally document this choice anywhere (although many states ask you to state whether your LLC will be member-managed or manager-managed in the articles of organization that you file to form your LLC). If you choose manager-management for your LLC, you will probably have to clearly spell out this choice somewhere in your LLC’s organizational documents.

Regardless of the management structure, all LLCs should have a written operating agreement. In a member-managed LLC, this agreement includes things like:

  • Member voting rights
  • Additional capital contributions
  • Buy-out provisions
  • Other important issues for the owners

If you will be manager-managed, your operating agreement should address what authority and responsibilities the manager, or managers, will have. For example, will the managers have sole authority for all hiring and firing decisions? For capital expenditures? Documenting the extent of the manager’s—or managers’— authority can help avoid problems down the road.

Even if you are the only owner of your LLC, you need to have an operating agreement. For a single-member LLC, the operating agreement helps you keep the limited liability of an LLC because it gives more proof that you are not a sole proprietor (with no limited liability).

If you don’t create your own operating agreement, then your state’s LLC rules will apply. Because these are not necessarily the rules that you want for your business it’s best to have your own operating agreement filed and in place.