Choosing how your LLC will be managed is a vital business decision. After all, good management rockets your business into success. Bad management dooms an LLC.
When you appoint managers for your LLC, you have two options for management structure: a member-managed LLC or a manager-managed LLC. In this guide, we’ll make your decision easy; we’ll establish the differences between these two structures so you can pick which one is right for you.
Member or Manager: What’s the Difference?
At first glance, member-managed LLCs and manager-managed LLCs appear the same. But there’s an important distinction: who handles the day-to-day affairs and decisions in the LLC?
For a member-managed LLC, each owner, formally called a “member,” is a manager of the business. They work at the business daily, helping to make key decisions about products, practices, and more. All members (or just one for a single-member LLC) act as managers in a member-managed LLC.
In a manager-managed LLC, however, the structure shifts. Instead of serving as managers themselves, the members vote on and appoint individuals to serve as managers for the day-to-day business activities. These appointed members can be a few of the members, or they can be non-members (i.e., not owners of the LLC) who are appointed just to manage the business.
The members of a manager-managed LLC who lack managerial authority are considered passive investors. They get a cut of the profits, but they cannot make decisions like opening or closing an account or firing an employee. Those powers are reserved for the managers.
In most states, a member-managed LLC is the default structure. The state assumes that your LLC adheres to that structure unless you note otherwise, usually on the Articles of Organization or the operating agreement.
Which Do I Choose For My LLC?
Knowing which structure to choose seems overwhelming, but the decision really depends on just two factors: the size of your LLC’s membership and the amount of management control each member wants.
If you’re a single-member LLC, the decision is simple. You want a member-managed LLC. The structure grants you full control as the manager of your business. And you don’t need to worry about the interests of multiple members, either.
However, membership size matters for other LLCs. If an LLC has a large number of members, then a member-managed structure is impractical. That would create too many managers for one business, and managerial interests could conflict. But if the LLC has only a few members, they can likely create an effective management team.
The amount of control each member wants also affects the decision. Some members want to be passive investors in the LLC without running it. (This is especially common in larger LLCs, so the two factors often go hand in hand). If only one or two members want to manage the business while the others are more “hands-off,” then the manager-managed structure is the right choice.
How Do I Document My Choice?
Regardless of whether your LLC is member-managed or manager-managed, your operating agreement should clearly define the roles of manager and member. The agreement will also set out which structure you’ve chosen.
It’s very important to establish the rules and roles of the managers and members in your agreement. Doing so will help you avoid problems later on. If you do not set this out in your agreement, then the state’s rules will govern your LLC. These one-size-fits-all rules are often disadvantageous for a manager-managed LLC; the state’s rules best describe the default, a member-managed LLC.
In some cases, you’ll need to officially declare the management structure of your LLC. These states usually include this as a section on your Articles of Organization, so it’s easy to do. You do not, however, file your operating agreement with the state.
Member-managed LLCs and manager-managed LLCs are somewhat similar. Each type has its own advantages, though, so you’ll want to make a careful decision. We hope that this guide has prepared you to make that decision.