Member Managed vs Manager Managed LLC: Everything You Need to Know
When comparing member-managed vs. manager-managed LLCs, it is important to first understand how an LLC actually operates. 3 min read
2. LLC Management
3. Member-Managed LLC
4. Manager-Managed LLC
5. Reasons for Choosing a Manager
Member Managed vs. Manager Managed LLC
When comparing member-managed vs. manager-managed LLCs, it is important to first understand how an LLC actually operates. Short for limited liability company, the LLC operates similarly to a corporation, but with some distinct features: LLCs do not have officers or a board of directors in the way that corporations do.
Owners of the LLC, also referred to as members, are protected from personal liability of the company’s debts. Whether it is a single-member LLC or multi-member LLC, the legal structure of an LLC ultimately protects its members from such personal liability.
This type of business structure is generally chosen by those who want to have direct involvement in the oversight and managing of their business. Furthermore, LLCs are easier to reorganize.
An LLC can be either member-managed or manager-managed. If the LLC is member-managed, then the members (owners) of the LLC will manage it. If it is manager-managed, then the owners will choose an outside manager to work for the company. Regardless of what type of state you operate in, there is no state law requiring that the members manage the LLC.
Managers of an LLC have the authority to:
- Make legal and financial decisions
- Open/close bank accounts
- Enter into contracts and other business agreements
- Purchase/sell real estate and other assets
- Dispose of or divest the LLCs assets
- Apply for financing
- Hire/terminate employees
A lot of LLCs are small businesses with few resources. For that reason, a majority of LLCs are member-managed. In fact, in most states, an LLC defaults to a member-managed LLC. In this type of management structure, the members can enter into contracts and other agreements on behalf of the LLC, as well as oversee the daily operations of the business. While each member oversees the business, it is important to remember that for multi-member LLCs, a majority must agree with that particular decision. For example, if only one of three members wants to enter into a particular contract, then the LLC cannot enter into that contract based on the fact that a majority of the members don’t agree with the decision.
Functioning as a member-managed LLC is advantageous for your start-up if you want to ensure that each member has significant input regarding the operations of the business.
If you operate an LLC that provides products or services, you might want to allow yourself and the other members to oversee the operations of the business. You’ll want to play an active role in the business, whether it be helping to make the products, offering the services yourself, hiring/terminating employees, etc.
If you choose to operate as a manager-managed LLC, then the manager(s) chosen will have ownership over the daily operations of the business, essentially acting as the board of directors would in a corporation. Therefore, you as the member, will not have such decision-making authority. However, you do clearly have some sort of authority over the LLC, including the control of voting on company issues. With that being said, members cannot be actively involved in the company’s operations. Therefore, the manager essentially becomes the agent of the company.
Another important item to keep in mind is that the manager can, in fact, be one of the actual members of the LLC. You can even hire another LLC or a corporation to be the member.
Reasons for Choosing a Manager
There are a variety of reasons as to why you might choose to operate in this manner. Some reasons include the fact that the members of the LLC don’t have the time to be able to put into the daily operations of the business itself. Another reason could be that the members don’t have the necessary skill set for managing a business. Perhaps the members don’t believe that they will all agree on the same decisions of the business, and therefore, to avoid conflict, they choose to hire a manager to oversee the LLC. In fact, some LLCs are family businesses, which mean that having a manager could be a great choice for them.
If you need help with learning more about member-managed and manager-managed LLCs, 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.