Our content is reader-supported. We may earn a commission if you make a purchase through one of our links.
Welcome to the intriguing world of limited liability companies (LLCs), where the art of managing your business takes center stage. Picture this: you’ve decided to embark on the entrepreneurial journey, and now you face the critical question of how your LLC should be managed. Here’s a head-to-head comparison of a member-managed vs manager-managed LLC.
Should you opt for a member-managed structure, where all owners actively participate in the daily operations? Or perhaps a manager-managed setup, where designated individuals handle the day-to-day affairs while the members focus on the big picture?
Join us as we delve into the fascinating realm of member-managed vs manager-managed LLCs, exploring the nuances, advantages, and factors that shape the decision-making process. Prepare to gain clarity and make informed choices that will steer your business toward success.
Choose the Right Management Style for Your LLC With ZenBusiness – The Best LLC Formation Service
Who Owns the LLC?
The owners of an LLC are known as members. Think of members as analogous to partners in a partnership or shareholders in a corporation.
If your LLC has managers, a member will more closely resemble shareholders and won’t participate in the management of the LLC. If your LLC doesn’t utilize managers, then the members will more closely resemble partners since they have a direct say in decision-making.
Management Structure of an LLC – Member-Managed vs Manager-Managed LLC
How does a member-managed LLC differ from a manager-managed LLC? It depends on the relationship between ownership and management.
One of the benefits of forming an LLC is this: An LLC is unique in that, by statute, it may choose one of two management structures. Either it can be managed by its members or by chosen managers (third-party individuals).
While member-management is the default rule according to state law, meaning that if managers are not selected in the Articles of Organization, the members will direct the affairs of the LLC the LLC can state in its Articles or LLC operating agreement that the LLC is to be managed by a manager.
This gives the manager authority to manage the daily operations of the LLC, including hiring employees, issuing payments, and entering into contracts. The owners of the LLC, however, retain authority for strategic business decisions such as applying for credit, forming business partnerships, etc.
Any decision about who will manage the LLC should be made before your company begins operations. For more information, read What is an LLC operating agreement and Why Do You Need One.
How Does a Member-Managed LLC Work
A member-managed LLC is a business entity in which all members participate in the decision-making process.
Each member has an equal right to manage the LLC’s business unless otherwise stated in the operating agreement. If a dispute arises, the vote of a majority generally rules. Although certain actions can require unanimous consent.
If the members consent, an LLC may be set up with different classes of members, with one class having greater or different management rights than others.
Reasons to Choose a Member-Managed LLC
While each situation is unique, the following scenarios may prompt you to choose that your LLC be managed by its members:
The members wish to play an active role in day-to-day management. The LLC only has a small number of members, and basic management decisions can be made without consulting other members. The members are familiar with the business and able to make informed decisions.
Rights and Responsibilities of LLC Members
LLC members have some key rights and responsibilities, including:
- Financial rights: Members have certain financial rights, such as the right to share in allocations of the company’s profits and losses. They can also share in distributions of the LLC’s assets.
The operating agreement will set forth the precise nature of those financial rights, such as whether they are shared equally, based on capital contributions, or some other criteria. It’s important to note that although members manage the business and its affairs, they do not own the LLC’s property.
- Right to vote: The scope of a member’s voting rights depends on whether the LLC is managed by its members or by managers. In a member-managed LLC, members can vote on all matters that affect the business and its affairs.
In a manager-managed company, members have limited voting power. All voting-related rules, such as meeting locations, requirements to quorum, etc., should be included in the operating agreement.
- Member inspections: Some states require that LLCs maintain certain records and provide the right for members to inspect these records. Records include the names, addresses, contributions, and shares of profits and losses of each member.
They also contain the names and addresses of managers and certain tax records. If your LLC wants to restrict or expand a member’s right to inspect these records, this can be stipulated in the operating agreement.
- Liability of members: A key characteristic of an LLC is that members are not liable for the company’s debts or obligations. However, members are obligated to make required capital contributions. Any penalties for failing to do so are set forth in the operating agreement.
Pros of Manager-Managed LLC
- Makes it easy for investors to passively invest in the business
- Makes it easier for large LLCs to operate quickly
- Allows managers with active control to make quick decisions without having to get the consensus of all owners
- Centralizes decision-making authority, preventing a “too many cooks” situation
Cons of Manager-Managed LLC
- All owners don’t get to participate in management decisions
- Need to carefully document the manager’s authority in the operating agreement
- A professional manager might not understand the business as well as the owners
- A professional manager needs to earn a salary, which can be hard on smaller businesses
What if the LLC Has One Owner (Single-Member LLC)?
Many small businesses operate as single-member LLCs, meaning they have one member or owner. In many cases, single-member LLCs opt to be member-managed.
For federal tax purposes, a single-member LLC is a “disregarded entity” and still has asset protection. Business income and expenses are reported using Schedule C and carried over to personal IRS Form 1040.
How Does a Manager-Managed LLC Work
As stated above, members don’t participate in the day-to-day management of a manager-managed LLC. Instead, managers make these business decisions.
It’s important to note that a member can also act as a manager, just as a shareholder can be one of a corporation’s directors. Alternatively, the manager may be an outsider.
In a manager-managed LLC, the business is managed like a corporation, with a central governing body that deliberates and acts on the LLC’s behalf without first obtaining the members’ consent. The managers may run daily operations, or they may appoint officers to do that.
The number of managers that an LLC chooses should be listed in the operating agreement as well as the qualifications of those managers.
Reasons to Choose a Manager-Managed LLC
A manager-managed LLC can make sense for your business if certain LLC members don’t intend to take part in decision-making (typically family members or outside investors). If the members choose this option, the members will not have a say in ordinary business decisions designed to help achieve their business goals.
As mentioned above, LLC managers can be LLC members/owners or third-party individuals outside the organization (although this is unusual for a small LLC).
A manager-managed LLC is often chosen when some or all members just want to be passive investors, there are many members, or they lack management expertise or are unfamiliar with the type of business being conducted.
Rights and Responsibilities of Managers
Details of a manager’s rights and responsibilities are set forth in the LLC operating agreement. This includes stipulations about the locations of meetings, quorum, voting, and notice requirements.
It also states if participation by video conferencing is allowed, whether committees will be formed, and how vacancies will be filled.
Below is a breakdown of the typical rights and responsibilities of an LLC manager:
- Fiduciary duties: Whether your LLC is managed by members or outside managers, these individuals owe special duties to the LLC and its members these are known as fiduciary duties.
- Liability of managers: A manager is not liable for the LLC’s debts and obligations. However, they may be held liable to the LLC or its members.
For example, a manager may be liable for a breach of fiduciary duty or of the operating agreement or for voting for the unlawful distribution of the LLC’s assets.
- Indemnification: An LLC manager may have financial protection against expenses and liabilities that may be incurred in defending themselves against claims based on their conduct.
This is known as indemnification, and some state LLC statutes require or permit the company to provide reimbursement. Other statutes where the LLC is not required to provide indemnification instead require that the LLC has the authority to indemnify its managers and members.
The circumstances under which the LLC will indemnify managers and members may be outlined in the operating agreement.
Pros of Member-Managed LLC
- All members have a say over management decisions
- Less complicated structure, particularly for small companies
- Excellent choice for retailers and other brick-and-mortar businesses
Cons of Member-Managed LLC
- Management of the LLC can be a full-time job, taking owners’ time away from strategic decisions
- This structure makes it difficult to raise money from investors
Can a Single-Member LLC Be Manager-Managed?
If you decide that as an owner or member, you don’t want to manage the LLC, then you can choose to have your LLC may be manager-managed.
For example, if your LLC owns a series of restaurants, you may want to appoint a manager to run each restaurant, manage employees, take care of inventory, etc. These responsibilities are all laid out in your operating agreement and the articles of organization.
Document Your LLC Management Choice
If you choose member management, you might not be required to formally document this choice anywhere. However, many states ask you to state whether your LLC will be member-managed or manager-managed in the articles of organization that you file to start your LLC.
Nevertheless, all LLCs should have a written operating agreement that defines the basic rights and responsibilities of the members (and managers, if you have them).
How to Choose? – Member-Managed vs Manager-Managed LLC
Choosing between a member-managed and manager-managed LLC depends on the specific circumstances of your business.
If you have family investors or multiple owners, a manager-managed LLC is beneficial as it centralizes decision-making authority in a few key individuals, simplifying the decision-making process.
This structure is particularly advantageous for larger LLCs where coordination among every member for every business decision is impractical.
On the other hand, for small businesses with two or three co-owners, a member-managed LLC is often the simplest choice. It allows owners to divide management responsibilities among themselves and provides them with greater influence over the direction of the business, which is often desired by entrepreneurs.
Additionally, a member-managed structure is advisable when specialized expertise is crucial for the business.
For example, in Steven Sinatra’s case, owning a pawn shop requires extensive knowledge and skills that are not easily replaceable. With member management, owners have the flexibility to run the business according to their preferences and address issues promptly.
In summary, the choice between member-managed and manager-managed LLCs depends on factors such as the number of owners, desired decision-making processes, and the need for specialized expertise within the business.
Consulting a Business Attorney
Deciding how your LLC will be run and managed is a big decision to make upfront. If you and your co-owners have worked together before or you have experience managing a business, you can probably make this decision on your own.
But if you and your co-owners have different business interests or you need legal guidance on dividing management roles and responsibilities, you should talk to a business lawyer. An attorney can help you draft an operating agreement and advise you on the best legal organization for your business.
Member-Managed vs Manager-Managed LLC – Frequently Asked Questions
Do I Need to Document My LLCs Management Structure?
Yes. Some states require you to specify your management structure on your LLC articles of organization. Other states leave it up to you to include it in your LLC operating agreement. In most states, if you don’t document a choice, your LLC will be a member-managed LLC by default and subject to the default rules of your state.
What Is a Governor in an LLC?
A governor in an LLC is someone who has decision-making power in the business. A governor could be a manager or a member, depending on how your LLC operates. Currently, only Washington, Idaho, and D.C. use the term “governor” to describe who runs the business.
Are LLC Members Employees?
Not generally. An LLC member is an owner, not an employee. Employees make a salary/wage, and require setting up payroll and withholding taxes.
By default, all LLC income “passes through” to the members and is considered self-employment income. An LLC member can pay themselves through something called an owner’s draw, but that’s not considered a salary.
However, an LLC member hired to take on management duties (a managing member) can be an employee. In that case, the managing member can be compensated like an employee, but this should be well-documented in your LLC’s operating agreement.
Bottom Line on Member-Managed vs Manager-Managed LLC
In conclusion, the choice between a member-managed and manager-managed LLC ultimately boils down to the specific needs and dynamics of your business.
Consider factors such as the number of owners or investors, their desired level of involvement, and the specialized expertise required. A manager-managed structure can be beneficial for larger LLCs, centralizing decision-making and streamlining operations.
On the other hand, a member-managed LLC empowers individual owners with greater control and flexibility, particularly in smaller businesses or those with specialized knowledge requirements.
Whichever option you choose, remember that it’s crucial to consult with legal and business professionals to ensure compliance and make informed decisions. So take the time to assess your unique circumstances and align your LLC’s management structure with your long-term goals.
About the author
Dr. Gabriel O'Neill, Esq., a distinguished legal scholar with a business law degree and a Doctor of Juridical Science, is a leading expert in business registration and diverse business departments. Renowned for his academic excellence and practical insights, Dr. O'Neill guides businesses through legal complexities, offering invaluable expertise in compliance, corporate governance, and registration processes.
As an accomplished author, his forthcoming book is anticipated to be a comprehensive guide for navigating the dynamic intersection of law and business, providing clarity and practical wisdom for entrepreneurs and legal professionals alike. With a commitment to legal excellence, Dr. Gabriel O'Neill, Esq., is a trusted authority dedicated to empowering businesses within the ever-evolving legal landscape.