LLC Organizational Structure: Everything You Need to Know
The process for creating an LLC depends on the state law where your business is located. 3 min read
With an LLC organizational structure, members have flexibility. Even though most state law requirements for LLCs allow its members to decide how to run their organization, there are a few things to keep in mind:
- Formalize the type of management structure you will have in writing.
- Create an operating agreement even if your state law does not require it.
- Evaluate your business needs and member management skills when deciding who will run your company.
Forming an LLC
The process for creating an LLC depends on the state law where your business is located. You usually only have to file a document called “articles of organization” or “certificate of formation with your state agency. While only two states, Missouri, and New York, call upon LLC members to create an operating agreement, you should create one even if your business is not located in either of those states. An operating agreement is a document that details how your company will run. It documents, among other things, whether your business will be member-managed or manager-managed.
LLC owners are known as members. A "single-member" LLC is an LCC with one member. While the term for an LLC with more than one member is a "multi-member" LLC. When you file your articles of organization for your business, it becomes its own legal structure outside its members. This means the LLC can construct business deals. Your management structure dictates who has the authority to conduct transactions on behalf of your LLC.
Member-Managed LLCs Versus Manager-Managed LLCs
As a benefit to an LLC organizational structure, you and your partners get to decide how to run your company. LLC members need to determine if the company will be managed by the members, by a non-member, or a combination of both. An LLC led its members has a member-managed structure. On the other hand, an LLC managed by a non-member or a mix of some members and non-members has a manager-managed framework. This means at least one member is not involved in running the business. Members of a manager-managed LLC that do not take part in managing daily operations are known as passive investors.
Member-Managed LLCs: The More Common Choice
Most LLCs are member-managed, meaning that the members manage the business. One of the reasons member-managed LLCs are popular is because LLCs are usually small business owners with limited resources and are not big enough to call for a separate management team to run the business. Since LLCs are usually not as complex as corporate management structures, it is a good management choice for business owners who want to run the day-to-day business operations.
Manager-Management: Better in Certain Circumstances
In some circumstance, you may prefer a manager-managed business. A manager-management structure is typical in situations where you have some members who only want to be passive investors in the organization. These members still make strategic decisions about the company, but they cannot make any business operation decisions except for replacing the manager or voting to convert the business back to a member-managed entity. If an LLC is manager-managed, then only the manager or authorized representative can unilaterally bind the company.
The manager-management structure is also better where for an LLC when:
- The business who to large and complex for members to manage it.
- When members do not have management skills to run the business efficiently.
- When you have a combination of the two — complex organization and members lacked the proper skills.
Document Your Choice
Even if your state does not mandate you to document how you will manage your company when you form your LLC, it is an excellent practice to formalize your structure. If you do not outline your business operations, it could cause confusion in a business crisis. You should also have an operating agreement that outlines member and management rights. If you do not create an operating agreement, then your state's provisions apply, and it may be to your organization's detriment.
While state laws do not mandate how LLC members run their organization, it is best to adopt and document a practice that is right for your business needs.
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