Member or Manager LLC: Everything You Need to Know
When choosing between a member or manager LLC management structure, you must consider several factors. The owners of a limited liability company (LLC) are known as members. 3 min read
When choosing between a member or manager LLC management structure, you must consider several factors. The owners of a limited liability company (LLC) are known as members. LLC members own a percentage of the company, ranging from 1 to 100 percent. When taxed as an S-Corporation, the number of LLC owners is limited to 100.
When the word ‘management' is used in relation to LLCs, it usually refers to entering agreements and contracts and taking part in day-to-day business operations and decisions. Limited liability company managers can:
- Make legal decisions related to the company.
- Close and open business bank accounts.
- Buy and sell property such as real estate or financial instruments.
- Dispose of assets owned by the LLC.
- Get financing for the company.
- Interview and hire LLC employees.
The LLC manager is also obligated to act in the company's best interest at all times. Choose a manager for your LLC before beginning business operations. In your company's operating agreement, you should list your chosen LLC manager and set rules for how to make LLC business decisions. Delaying decisions about LLC management can result in difficult legal situations.
Types of LLC Management
Many LLCs are manager-managed, which means the LLC members have hired a professional manager and given that individual the responsibility of handling business operations and decisions. An LLC manager can be a company member or an outside manager hired by the company. You will likely be required to describe your management structure in your company's Articles of Organization. The method you choose for managing your LLC will also determine the form of operating agreement you will use.
In the case of a member-managed LLC, all LLC members are responsible for operating the company. With this management type, all members can make business decisions and can bind the company in contracts. However, if a member does not want to participate in the company's daily activities, he or she can pick a manager to work in their place.
If some LLC members are not interested in running the business and would prefer these duties be handled by other members, the LLC becomes internal-managed. Take, for example, an LLC that formed with four members. If two of these members only wish to invest in the business and do not want to participate in operations or decision-making, the other two members can be appointed as LLC managers with a unanimous member vote. This is called an internal-managed LLC because all managers are LLC members.
With an external-managed LLC, members usually aren't responsible for managing the company. Instead, they can hire an outside manager or management team to handle the company's affairs. It's important to understand that if an LLC does not have an operating agreement and the members have not outlined the company's management, the state will make the decision for the business, usually designating member management.
Binding Contracts in a Manager-Managed LLC
When managers operate a limited liability company, they have the sole responsibility of binding the company into an agreement or contract. LLC members do not have the ability to enter the company into contracts or participate in normal operations unless they receive written permission from the managers. While members of the company can advise the managers, managers are not required to follow this advice.
However, this doesn't mean members have no power in the company. For instance, the LLC members could decide to remove the company's manager and choose someone new for the role. Before a management change can take place, all members must agree to it in writing.
Member-Managed vs. Manager-Managed LLCs
With a member-managed LLC, all members must take part in the company's decision-making processes. All members are LLC agents and will be able to vote on company decisions. Members also have the ability to make decisions for the LLC, but contracts need majority member approval. Choosing a manager-managed LLC means members give up control of the company to one or more managers, who will serve as company agents. A member can serve as a manager, but this is not required.
If you need help choosing between a member or a manager 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.