Types of LLC Members: Everything You Need to Know
Companies have different types of LLC members, depending on how the owners decide to structure the business.3 min read
Companies have different types of LLC members, depending on how the owners decide to structure the business. In many ways, a limited liability company's management structure is similar to that of a corporation. An LLC, however, offers more flexibility.
Choosing a Member-Managed or Manager-Managed LLC
Limited liability companies are formed at the state level with no involvement from the IRS or federal government. You form an LLC by creating Articles of Organization and filing them with the state. In these articles, you designate which type of management structure you want to use to run your LLC: member-managed or manager-managed. Common LLC structures include two or more family members going in together on a family business or two or more parties that are not related joining together in a business venture.
In LLCs owned by more than one family, you can have one representative from each family act as members in the business. Individual family members can have their own interest in the business separate from the LLC.
The most common form of LLC is a member-managed LLC, in which the owners participate in the day-to-day operations of the business. This is a common approach for small businesses that might not have the resources to employ separate management to perform operations. It's also frequently chosen by owners who want to be directly involved in managing and operating their business.
An LLC does not have the same organizational requirements, such as officers and a board of directors, as other business structures.
In most states, your LLC will default to the member-managed structure if you don't specify otherwise when filing your formation documents or operating agreement. In a member-managed LLC, it is advisable to have an operating agreement outlining such things as:
- The members' voting rights.
- How additional capital contributions will be handled.
- Provisions for the buyout or transfer of ownership.
- Other management and operational issues.
While all the members will have decision-making abilities in the company, contracts and loan arrangements most often require the approval of the majority of the LLC members. An operating agreement can help outline the process for handling these decisions and reduce the risk of conflict over business issues.
If an LLC is a single-member LLC, the sole owner is considered the one managing member. This individual can be referred to as a member-manager, manager, or any other officer title.
You can also have what is referred to as a manager-managed LLC, in which the members designate specific members or third parties, known as managing members, to engage in the day-to-day responsibilities of running the business. Typically in this business structure, the other members prefer to be more passive investors who do not want to have the responsibility of operating and managing the company. Individuals you can name as managers include:
- Designated members.
- Designated nonmembers or outsiders.
- A combination of members and nonmembers.
Some companies prefer the manager-managed structure, and in some states, you can even have other LLCs or corporations responsible for managing your LLC. These managing entities are typically paid executives who have had the experience of operating similar types of businesses. When a company has a manager-managed structure, the non-managing members will not participate in daily business functions and will not have the authority to enter the company into binding contracts.
There are two situations in which owners might find the manager-management structure more favorable, such as:
- If the business is too large, diverse, or complex to be able to divide management out among members.
- If the members lack the experience or skills to manage the company properly.
If you choose a manager-managed structure, you can benefit from having managers running the business who are skilled in that area. When choosing this structure, you are required by law to indicate this choice on the LLC's organizational documents. This can be in either the Articles of Organization you file when you form your LLC or outlined in the Operating Agreement.
When drafting your Operating Agreement, some management rights your members might want to retain include:
- The ability to replace the managers.
- The ability to make all major decisions.
If you need help with types of LLC members, 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.