Member Vs Manager LLC: Everything You Need to Know
Choosing between a member vs. manager LLC business structure is an important step in forming your new company. You're going to need to have a thorough understanding of these two structure variations in order to make an informed decision.3 min read
3. Member-Managed LLCs: The More Common Choice
4. Manager-Management: Better in Certain Circumstances
Choosing between a member vs. manager LLC business structure is an important step in forming your new company. You're going to need to have a thorough understanding of these two structure variations in order to make an informed decision.
What Is the Management of an LLC?
The LLC, or Limited Liability Company, business structure is a relatively new option for business owners in the United States. In terms of management, an LLC functions in similar ways to the corporation business structure. In other ways, however, the management structure of an LLC is different from that of a corporation. When you form your new LLC, you're going to need to decide which management structure the company will adopt.
LLCs have two different management structures to select from:
- A member-managed LLC
- A manager-managed LLC
Member-managed companies are managed by all of the owners, or members, of the business. A manager-managed LLC can either be managed by designated members, non-members, or any combination of the two. Non-management members in a manager-managed structure are typically passive investors in the company and are not usually involved in the daily operations of the business.
"Management" can take on a number of different meanings when you're dealing with an LLC business structure, depending on how the Operating Agreement is written. Generally speaking, though, management equates to the authority to enter into contracts and agreements on behalf of the company, contribute to business decisions, and play an active role in daily operations. Managers in an LLC also have the ability to do things like:
- Make financial and legal decisions
- Open and close business banking accounts
- Enter into contracts and agreements
- Make purchases on behalf of the company
- Make decisions regarding company assets
- Obtain loans and financing on behalf of the company
- Hire staff and contractors
Any managers within the LLC have a legal obligation to act in the company's best interest.
Member-Managed LLCs: The More Common Choice
Member-managed LLCs are the most common structure, especially among small business owners because they allow all of the company's members to share in the responsibility for the company's daily activity. An LLC has a relatively straightforward and streamlined organizational structure, unlike corporations which are required to have things like officers and a board of directors in place. This makes the LLC business structure the ideal choice for business owners who want to be directly involved in the direction of the company.
Set up a member-managed LLC if you and the other members or owners involved in your company are interested in running the business yourselves. For example, if you're forming a team of mobile application developers and you each want to collectively decide what applications to develop, how to develop them, what software will be used, etc., you'll want to structure your business as a member-managed LLC.
Most states automatically classify a new LLC as member-managed unless you specifically indicate that you wish to form a manager-managed company. If you do not specifically designate your company as either member-managed or manager-managed, your company will be established as a member-managed LLC by default.
In a member-managed LLC, all of the company's members participate in the daily operations and decision-making processes of the company. Additionally, every member is also considered to be an agent of the company and has a voice when making important business decisions. Every member also has the authority to make independent decisions on behalf of your company. Things like contracts and loan agreements, however, must be approved by a majority vote from all company members.
Manager-Management: Better in Certain Circumstances
Under certain circumstances, it may be better to incorporate as a manager-managed LLC. In a manager-managed LLC, management can be established in a number of different ways, including:
- One or more company members can be designated as the manager
- An outside entity is designated as a manager
- Any combination of the previous two choices
Designated managers are the only ones who have the authority to act on the company's behalf, enter into contracts, or make daily business decisions. The most common reason to select a manager-managed LLC is if you want to be a passive investor but you're not necessarily interested in participating in the company's daily operations.
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