An LLC’s Basic Structure

The LLC corporate structure is the way limited liability companies are organized in order to operate. All business entities must have some form of organizational structure, but unlike corporations, which have a more formal structure and more requirements to meet, LLCs are much more flexible in their structure. Essentially, the structure of an LLC can be tailored to suit the needs of the business and its owners, while corporations are required to select a board of directors and officers to oversee the big-picture and day-to-day business of the company, respectively.

That said, the owners of an LLC may choose to operate their company like a corporation, with officers and directors, while an owner of a corporation may also act as its sole shareholder, officer, and director, if they desire. Single owners of LLCs may also pursue a similar path, or they may forgo such structures altogether. If such is the case, forming a single-member LLC can be a good option if one has no use for corporate formalities and as long as one’s state allows it.

Choosing a Management Structure

Regardless of their status as single-member or multi-member, LLCs have two forms of management: manager-management and member-management. What form you opt for should be set out in your Operating Agreement or Articles of Organization. If you do not choose between these two, in most states, the default will go to member management.

The key difference between these two types of management relate to the relationship between management and ownership. Manager-managed LLCs have an owner acting as the manager, while manager-managed LLCs have an manager who acts separately from the owner or owners. In the latter instance, the manager is usually vested with the authority to deal with the day-to-day business of the LLC, like managing personnel decisions, entering into business contracts, and writing checks. This leaves the owners free to deal with big-picture issues like securing loans, acquiring other businesses, and planning the direction of their business.

Generally speaking, single-member LLCs favor member-management, but there are some scenarios in which manager-management is preferable. For instance, if your LLC is in the retail business, it may be desirable to give a manager the authority to run an individual store, handle inventory, manage employees, and see to other ground-level, store-related issues. The specific responsibilities of any manager should be defined in your Operating Agreement.

Creating an Operating Agreement

While an Operating Agreement is not a requirement to establish an LLC, it is recommended. An Operating Agreement sets out the internal rules and regulations of the company and can be helpful in establishing the LLCs structure and operating procedures. In a multi-member LLC, it can state what powers and voting rights members will have, how profits will be distributed to members, how a member’s exit from the company will be handled, and how the company will be run in general, as well as many other details.

In a single-member LLC, an Operating Agreement can state how funding will be handled, who is responsible for decision making, and what will happen to the business in the event of the owner’s incapacitation. For single-member LLCs, it can also provide increased proof of separation between an owner’s business and personal affairs. This will give you increased limited liability protection.

In either case, an Operating Agreement can be tailored to your LLC’s specific needs and it can be as simple or as complex as you desire.

Contrast to the Corporate Management Structure

One of the aspects of the LLC that many find appealing is its less rigid structuring requirements. Contrast this to the corporation, which has many structural requirements that must be followed. Such requirements include:

  • A three-tiered level of management, running from shareholders to directors to officers
  • Shareholders to own stake in the business and elect who will run the business
  • Directors on a Board of Directors to run the big-picture aspects of the corporation and to select officers
  • Officers to run the day-to-day aspects of the corporation
  • More than one director if there is more than one shareholder (in most states)
  • There being annual meetings held, and minutes kept of these meetings

These are just some of the important issues relating to LLC corporate structure. If you need further help understanding LLC corporate structure, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.