LLC Management Structure: Everything You Need to Know
A Limited Liability Company (LLC) is a legal entity which is managed by its members. A member is defined as an individual who has an ownership interest in the company.4 min read
Two types of LLC management structures exist: member-managed and manager-managed. This article will cover the key aspects of each management structure.
A Limited Liability Company (LLC) is a legal entity which is managed by its members. A member is defined as an individual who has an ownership interest in the company. LLCs have a more streamlined organizational structure compared to corporations due to the lack of formal structures such as a board of directors. An LLC provides its members with more flexibility and control, it also limits personal liability.
There are two types of LLC management structures: member-managed LLC and manager-managed LLC.
A member-managed LLC may consist of single or multiple members. Each member has the authority to make decisions to bind the LLC. This structure provides each member with the responsibility to play an active role in the management and operation of the business.
A member-managed LLC may be suitable if the following is true:
- The business is small.
- The business has limited resources.
- The business has a low number of members.
- Members have sufficient management experience and skill.
- All members want to be active participants in operational decisions.
To establish the organizational structure, an operating agreement may be created. An operating agreement is a binding contract between members. It can formalize conditions such as member voting rights, capital contributions, buy-out provisions and decision making. For example, it may state that a decision can only be made if there is consent from a percentage of all members. Alternatively, it may stipulate a management model where certain members are responsible for specific areas of the business.
A manager-managed LLC is where one or more individuals are selected as the LLC manager. The LLC manager has the authority to manage the company and may be a member or a non-member (externally contracted).
Unlike in a member-managed LLC, members of a manager-managed LLC cannot make decisions to unilaterally bind the company. Members are also unable to interfere with the LLC manager's operational decisions. However, members can make structural decisions and changes to the company. For example, members can replace the manager or change the company to a member-managed structure.
An operating agreement is important to formalize the roles and responsibilities of the manager and the members. The document can limit the authority delegated to the manager.
A manager-managed LLC may be suitable if the following is true:
- The business is large and complex.
- Members lack sufficient management experience and skill.
- All or some members do not want to be active participants in operational decisions.
Frequently Asked Questions
How do I create an LLC?
The specific rules governing LLCs differ from state to state, but the general process for creating an LLC is similar across states. Be sure to look up the requirements in your state to ensure you are following all applicable laws.
Which LLC management structure is better?
The most appropriate structure will depend on the nature and size of your business, as well as the role (active vs passive) that members want in the management of the business. Discuss these issues with a lawyer to determine the most suitable structure.
Do I need an operating agreement?
Irrespective of the type of LLC, there should be a formalized operating agreement that defines the rights, roles, and responsibilities of its members and managers. This would mitigate any misunderstandings that may arise in the future about who has authority to make decisions and bind the company.
If you do not have an operating agreement, then your state's LLC rules will apply. Those rules may not be favorable for your LLC.
Do I need to document whether the LLC is member-managed or manager-managed?
Yes. Depending on the state, if the type is not stated, it will assume it is operating as a member-managed LLC. To reduce complications, it is advisable to clearly state the management structure on the operating agreement or articles of organization.
If I am a single-member LLC, I know I would make all operational and management decisions. Why would I need to create the operating agreement?
As the business is an LLC, this means that you would not be personally liable for debts of the business. However, as the sole owner, there is the risk that personal and business finances can become blurred. In the event of litigation where the plaintiff attempts to lift the corporate veil, a formalized operating agreement provides clear evidence of the separation between the LLC and your personal finances. This will safeguard your personal assets.
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