When forming an LLC (Limited Liability Company), you have options for how you want to manage your company. With summer here, I’m going to break down your choices in a way we can all relate to as we’re looking for ways to keep cool: ice cream!
You have two “flavors” to choose from when setting up your LLC:
- Member-managed LLC
- Manager-managed LLC
These choices exist whether you have a single-member LLC or a multi-member LLC. If you don’t specify your management structure in your LLC’s Articles of Organization or Operating Agreement, most states will consider you a member-managed LLC by default.
The “Scoop” On How Member-managed LLCs And Manager-managed LLCs Are Different
What should you know about the differences between these two flavors of management? The distinction lies in the relationship between ownership and management within the organization.
In a member-managed LLC, the business owner (a.k.a. member) is also the manager. When there are multiple owners, they all participate in running the business (unless the operating agreement states otherwise).
In a manager-managed LLC, the business has a defined manager role that is separate from ownership of the company. In this type of management structure, the manager typically has authority to handle all day-to-day operational duties for the LLC. The manager will usually have responsibility for activates such as writing checks to pay bills, hiring (and firing) employees, and signing business contracts. Owners generally take on higher-stakes decisions such as buying real estate for a new location, securing funding, acquiring another company, etc.
A nonmember (or multiple nonmembers) may be assigned the manager role, or one or more designated members might be given responsibility to run the business. It’s also possible to have a combination of members and nonmembers acting as managers.
Which Flavor Of LLC Should You Choose?
Because LLCs tend to be small businesses with owners who want direct involvement in running their companies, most decide to operate as member-managed. LLCs often have limited resources, which also comes into consideration when choosing between the owners handling day-to-day operations vs. hiring someone to manage the business.
In some situations, however, you may find it more practical to create a manager-managed LLC. For example:
- Your business is too complicated or large to effectively share management responsibilities between members. (For instance, if you own several retail locations, you might decide it’s more efficient to hire on-site managers who can capably handle the day-in, day-out decisions and administrative tasks.)
- Your LLC’s owners don’t have the necessary management skills or knowledge to operate your business successfully.
- Certain members of your LLC only want to be passive investors in the business, without operational responsibilities.
More Than A Matter Of Taste
Although they come with fewer choices than flavors of ice cream, put careful thought into which LLC management structure will work best for your company.
As you’re starting your business, I recommend you don’t jump into the decision of member-managed vs. manager-managed LLC without the guidance of a legal professional.
And regardless of which LLC management option you ultimately choose, make sure you have a carefully crafted and detailed LLC Operating Agreement created. It will serve as your company’s governing document, specifying roles, responsibilities, rules, and processes for members and managers.
By stating how your company should be managed, who has which responsibilities, how decisions will be made, how profits should be split, what happens if an owner wants to sell her ownership interest, what happens if an owner dies, and other specifics, it can help avoid misunderstandings and disputes.
Indeed, selecting your LLC’s management structure is more than a matter of taste. Do your homework to increase your understanding of your options, get professional legal help to make sure you’re covering all your bases, and consider using a trusted online business document service to ensure all your formation paperwork is submitted accurately and on time.