What does it mean to have a manager-managed LLC vs. a member-managed LLC? We explain the differences
When filling out the Articles of Organization to start your limited liability company (LLC), you might trip over the question “Will your LLC be member-managed or manager-managed?” It’s a little odd, sounding, like, “Do you want your produce farmer-farmed?” or “Do you want your software programmer-programmed?” But more than an exercise in alliteration, they’re asking you to make an important decision as to how your business will be run, by its members or by one or more managers.
Like corporations, LLCs offer business owners liability protection, meaning that the liability and debts of the business are separate from those of the owners. When someone sues an LLC or corporation, they generally can’t go after the owners’s personal bank accounts. But part of the LLC’s appeal over a corporation is flexibility, including determining how the company will be run, by its members (the term for the owners of an LLC) or by one or more managers.
Let’s look at the issue of member-managed vs. managed-managed to help you determine what would best fit your LLC.
LLCs were created largely with small businesses in mind. Small companies tend to have a small number of owners, and those owners usually want to share in the decision-making and play an active role in the day-to-day operations of the business. They don’t need a big, separate system of management like a corporation’s board of directors. All LLC members have a vote in making financial and legal decisions for the company.
Most LLC owners use this management structure, and, if you don’t specify otherwise, most states will assign you member-management by default. But there are reasons why a business might prefer to use manager-management.
Being manager-managed simply means that the owners of the LLC appoint one or more persons to run the company. This could mean designating one or more members to be managers, hiring manager(s) from outside the LLC ownership, or both.
One situation in which manager-management might be preferable is when some LLC owners want to be investors in the LLC with a more passive role and don’t want to participate in the ongoing decisions, participate in day-to-day management, and daily work involved in the business.
As an example, say you have a family business with you, your sister Tina, and your Uncle Frank. Uncle Frank likes the business idea and wants to put up the majority of the startup capital, but he has other interests and doesn’t really want to mind the store, do inventory, make management decisions about the company, etc. He trusts you and Tina to handle that. And, it’s just as well, since your faith in Uncle Frank’s decision-making abilities has waned ever since you let him pick out the drapes for the front room.
In this case, you could designate Tina or yourself to be the managing member of the LLC. Uncle Frank wouldn’t have management authority, but he’d still maintain his ownership percentage of the LLC.
|Appeals to:||LLCs with fewer owners|
Owners who want to run the daily operations for the business
|LLCs with many owners|
Owners who are primarily passive investors and don’t want to be as involved in ongoing business operations
|Decisions made by:||All owners of the LLC have a say in business decisions||A manager (an owner or non-owner) is chosen to run the company|
LLCs can have an unlimited number of members, meaning some of them can be quite large. In a multi-member LLC with many members, getting all of the members together regularly to vote on every business decision can be challenging.
Consequently, LLCs with a large membership often appoint one or more members (ideally, the ones with the most business expertise) to handle the management of the company or hire a professional manager from outside the group to run things.
Another example: You and some friends informally start a farmers’s market outside your hometown. As you attract more clients, you also attract more farmers who want to be a part of this successful market you’ve created. Before long, you have 30 farmers all wanting to sell their produce along with you, and you all decide that you would collectively benefit from making the market an LLC.
The problem is that none of you feel as confident about business management as you do about growing juicy, delicious tomatoes, and it’s hard to round up 30 people for a vote every time a business decision has to be made. So, to simplify the decision-making process, you hire a professional manager with a business background to handle those aspects of the market.
LLCs afford you many choices in how to manage your company, but they don’t do you any good if you don’t spell them out on paper. Many states ask you to specify your type of management structure in your Articles of Organization or other formation documents, but, in any state, it’s important to spell out your management preferences in your LLC operating agreement.
Previously we’ve written about the importance of having an operating agreement for your LLC. This vital document establishes the rules for your LLC, including ownership percentages, how profits are divided, what happens when one owner wants to leave or sell their share of the business, and, of course, how the LLC will be managed.
Having an operating agreement is critical for many reasons, particularly management. If you’re doing member-management, you use this document to establish what the voting rights and obligations of each member are along with other managerial/operational issues.
The same applies to the manager-managed structure, more so if you’re hiring a manager from outside the LLC. Without an operating agreement, how will you establish how much authority the manager has? Will the manager make all decisions for the company, or will some, such as hiring and major purchases, be reserved for the LLC owners? If these questions aren’t answered at the start, they may be determined by the state later if conflict arises, and there’s no guarantee you’ll like their decision.
Creating a comprehensive operating agreement for your LLC can be intimidating, but we can help with that. We offer a guided, customizable template to help get you started. Our chatbot walks you through the process of creating your agreement and allows for e-signature of the document.
Now that you know more about the issue of a manager-managed vs. member-managed LLC, you may be closer to forming your own limited liability company. If so, our business formation services can help. And, our operating agreement template can help you forge a document that sets down the rules for how your LLC will be managed. Chat with one of our business professionals today to learn more.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Here’s what to know about being an LLC member vs. manager: A member-managed LLC is run directly by the LLC’s members (owners), and they make all of the decisions about the company, including the day-to-day operations. A manager-managed LLC is run by one or more managers who have management responsibilities. The manager(s) can be a member appointed by the other members or a manager hired from outside the LLC ownership.
“Member-managed” means that the LLC is run by its owners without the help of an appointed or hired manager.
An authorized member is an owner in an LLC who has the authority to act on behalf of the LLC, including making legal decisions, as defined by the terms established in the LLC’s operating agreement.
A manager in an LLC can be a member or a person hired from outside the LLC membership to manage the company. The extent of power and authority of the manager needs to be spelled out in the operating agreement. For example, some LLCs may give the manager the ability to make more minor operational decisions about the LLC, but not allow them to have more important decision-making powers, such as bringing in new members, hiring employees, etc.
Not necessarily. An LLC can appoint one or more members to be a manager, but they can also hire a manager from outside the LLC ownership.
Most single-member LLCs (LLCs with a sole owner) will be member-managed, but, as the company grows, some single-member LLC owners may hire a manager to handle running the business.
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