Key Takeaways

  • LLCs can be managed as member-managed or manager-managed, each offering different levels of control and involvement for members.
  • Member-managed LLCs suit smaller or family-run businesses, allowing members to actively participate in management decisions.
  • Manager-managed LLCs are ideal for larger businesses where not all members wish to be involved in daily operations, or where professional management is desired.
  • An operating agreement is critical for defining the LLC's management structure, roles, and decision-making processes.
  • Single-member LLCs often default to member-managed status but can benefit from an operating agreement for legal clarity and operational flexibility.
  • The choice between member-managed and manager-managed structures depends on factors like business size, the desired level of member involvement, and the need for professional management.

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.

Member-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 is often preferred by small businesses or family-owned companies. In this structure, each member plays an active role in the day-to-day operations and has the authority to make decisions for the LLC. This arrangement is akin to a partnership where owners have direct control over business activities.
  • One of the key advantages of a member-managed LLC is simplicity. It doesn't require formal appointments or separate management, making it more straightforward to operate. However, it may become more complex as the number of members increases.
  • Decision-Making in Member-Managed LLCs: In this setup, members vote on business decisions, usually in proportion to their ownership percentage unless otherwise specified in the operating agreement. Having a clear operating agreement helps streamline decision-making and avoid conflicts.

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. 

Manager-Managed LLC 

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). 

  • In contrast, a manager-managed LLC is structured more like a corporation. This management style is ideal for larger LLCs, where not all members want to be involved in daily operations. The members appoint one or more managers who may or may not be members themselves. These managers handle the daily management and decision-making responsibilities of the LLC.
  • Roles of Managers: Managers can be individuals, entities, or companies hired to oversee operations. They are often responsible for setting the strategic direction, hiring staff, and managing business finances. This structure is helpful when some members are silent investors or when the LLC wants to tap into professional management expertise.
  • Operating Agreement in Manager-Managed LLCs: The operating agreement outlines the managers' responsibilities, including their authority to make certain decisions, manage finances, and enter into contracts on behalf of the LLC. It's crucial for defining the scope and limitations of a manager’s power to ensure clarity and compliance.

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.

LLC Management Structures for Single-Member LLCs

  • Single-member LLCs often default to a member-managed structure because there is only one member involved. In these cases, the owner has full control over decision-making and management of the company. However, a single-member LLC can choose to adopt a manager-managed structure by hiring a professional manager.
  • Operating Agreements for Single-Member LLCs: Even though an operating agreement is not always required for single-member LLCs, it is a good practice to create one. It helps outline the management structure, especially if the owner decides to bring on a manager in the future or clarify the member’s role in the case of potential disputes.

Key Differences Between Member-Managed and Manager-Managed LLCs

  • Decision-Making: In member-managed LLCs, all members share decision-making authority. In manager-managed LLCs, the appointed manager(s) handle decisions, reducing the administrative burden on the members.
  • Flexibility: Member-managed LLCs are typically more flexible for small-scale operations. Manager-managed LLCs offer more structure and are beneficial when not all members want to be involved in daily operations.
  • Complexity: A manager-managed LLC often requires more formal processes and documentation, including a detailed operating agreement that defines the roles and responsibilities of managers and members.
  • Control: Members retain direct control in a member-managed LLC, whereas in a manager-managed LLC, members delegate control to appointed managers.

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.  

An operating agreement is vital in defining the management structure of your LLC. It sets out the rules for how the LLC will be managed, outlining the responsibilities and authority of members or managers. Without an operating agreement, state laws will dictate default rules, which may not align with the specific needs or preferences of the LLC's members.

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. 

For single-member LLCs, having an operating agreement can help establish credibility with banks, investors, and other entities. It serves as proof that the business operates as a separate legal entity, which can be crucial in maintaining limited liability protection.

If you need help choosing an LLC management structure, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.