What is the difference between a Member-managed LLC and Manager-managed LLC?
When a business owner is establishing a new limited liability company , one of the many decisions they will have to make is how the business will be managed. There are two options for an LLC management structure: a member-managed LLC and a manager-managed LLC .
Both of these management options offer advantages and disadvantages and choosing the right business structure will depend on the business size, the number of members, and how the owners want the company to operate.
- Member-managed LLC- When an LLC is formed, the state will consider it a member-managed LLC by default. In a member-managed LLC, the members of the LLC all participate in the management and operation of the company. Every member has the power to make important decisions , sign contracts , and manage daily operations .
- Manager-managed LLC- If an owner chooses to have a manager-managed LLC it must be specified in the LLC formation documents or the operating agreement . A manager-managed LLC is a good option when there are a lot of members in an LLC. The members of the LLC will appoint a manager to run the day-to-day operations. The owners still retain the power to make important business decisions, but the manager will handle the day-to-day operations.
The more popular management structure is a member-managed LLC because most LLCs are small businesses with only one or two owners. In these types of businesses hiring a manager is usually unnecessary.
Responsibilities of an LLC Manager
If an LLC is a manager-managed LLC, the members must appoint someone to fill the manager position. Often, LLCs will appoint one of their own members to manage the company, however, some choose to hire a non-member for the job.
A manager’s duties will involve running the day-to-day operations of the company. Some companies will only need one manager while larger companies may rely on a team of managers who work together.
If a manager is also a member of the LLC, they will be responsible to fill two roles both as an owner and as a manager. This individual will be entitled to both member shares in the LLC earnings based on the percentage of ownership, and wages as a manager.
The specific roles and responsibilities of the manager of an LLC should be clearly documented in the company’s operating agreement.
Read this article for more information about the roles and responsibilities of an LLC manager.
How Member-managed LLCs Work
When a limited liability company is member-managed, all members of the company participate in the decision-making process for the business. Each member owns a percentage of the LLC and therefore each member receives a vote on important business decisions.
Pros of a Member-managed LLC
Member-managed LLCs offer a lot of advantages to the owners of the company. Some positive aspects of a member-managed LLC include:
- All members in the LLC have a say over management decisions
- This is a less complicated management structure, especially for small companies
- Member-managed is a great way to manage small retail businesses
Cons of a Member-managed LLC
Member-managed LLCs also have some drawbacks that need to be considered when choosing a business structure.
- Member-managed LLCs require that members wear two hats as both owners and managers. This can be overwhelming and take away time from other important business operations.
- This management structure makes it difficult to raise money from investors.
- Member-managed LLCs can come to deadlocks on voting if they have an even number of members with the same voting rights.
How Manager-managed LLCs Work
If an LLC is manager-managed, the members will hire a manager to take the responsibilities of the day-to-day business operations. The manager is often a member of the LLC however it isn’t uncommon for members to hire a non-member to manage the LLC.
The members of the LLC will exercise their control by voting on important business decisions instead of being actively involved in the company's day-to-day operations.
Manager-managed LLCs are common in the following business scenarios:
- An LLC has passive members- Passive members are investors who do not participate in the decision-making process of the LLC. When an LLC has both passive and active members, usually an active member will be appointed to the position of manager.
- A large LLC- There is no limit on the number of members that can be part of a multi-member LLC. When an LLC is a very large company, the manager-managed business structure is the best choice for the business. If there are many members, sharing the management responsibilities can be almost impossible. Members can delegate the daily business tasks to managers and keep their own focus on running the large-scale company.
- Members do not have adequate management skills- In some cases, a member may be able to invest in a company, however, they do not have any real management skills. If members lack adequate management skills, the business may not perform well. In this scenario, hiring an experienced manager is a good move.
Pros of a Manager-managed LLC
A Manager-managed business structure is a great choice for certain LLCs. Some advantages to having a manager run the daily operations of an LLC include:
- Allows investors to passively invest in the business
- Allows larger LLCs to operate smoothly and efficiently
- Managers can make daily operating decisions without the consensus of the board which is beneficial when a fast decision needs to be made
Many larger companies have found that centralized management works very efficiently because it consolidates administrative power and allows managers the authority to make decisions on behalf of the company. This however can also be a negative aspect of manager-managed LLCs.
Cons of a Manager-managed LLC
While some companies benefit from managers making a business decision, sometimes this authority is seen as negative because the owners of the LLC aren’t getting to participate in management decisions.
The manager's authority, duties, and limitations must be clearly laid out in the LLC operating agreement to avoid any issues.
Some other disadvantages of a manager-managed LLC that should be noted are:
- An outside manager might not understand the business as well as the owners
- Managers must be paid a fair wage or salary which can be a financial burden on smaller businesses
Roles of the LLC Operating Agreement
The operating agreement for a limited liability company is a very important formation document because it lays out how the company will be operated and governed. When an LLC chooses to be a manager-managed LLC, the operating agreement is especially important because most states require that the LLC declare this management structure in the formation documents.
It is important that the operating agreement specifically documents the authority and responsibilities granted to the manager. Consider these questions:
- Will the manager have authority over hiring and firing employees?
- Can the manager purchase supplies and equipment?
- Can the manager enter into binding contractual agreements?
- What decisions will the manager be required to get member approval on?
The operating agreement should also lay out the roles and responsibilities of the members of the LLC. This will include each member's share in the company, when meetings will be held, and how voting will work.
If your LLC does not have an operating agreement, your company is subject to the state’s LLC rules. State rules may not fit your company’s needs so it is better to create your own operating agreement that is tailored specifically to your company.
A clear well written operating agreement will not only help to avoid future disputes but will also help resolve disagreements within the company.
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