Member-Managed vs. Manager-Managed LLC

When filling out the Articles of Organization to start your limited liability company (LLC), you might trip over the question “Will your LLC be member-managed or manager-managed?” It’s a little odd, sounding, like, “Do you want your produce farmer-farmed?” or “Do you want your software programmer-programmed?” But more than an exercise in alliteration, they’re asking you to make an important decision as to how your business will be run, by its members or by one or more managers.

Like corporations, LLCs offer business owners liability protection, meaning that the liability and debts of the business are separate from those of the owners. When someone sues an LLC or corporation, they generally can’t go after the owners’s personal bank accounts. But part of the LLC’s appeal over a corporation is flexibility, including determining how the company will be run, by its members (the term for the owners of an LLC) or by one or more managers.

Let’s look at the issue of member-managed vs. managed-managed to help you determine what would best fit your LLC.

Member-Managed LLC

LLCs were created largely with small businesses in mind. Small companies tend to have a small number of owners, and those owners usually want to share in the decision-making and play an active role in the day-to-day operations of the business. They don’t need a big, separate system of management like a corporation’s board of directors. All LLC members have a vote in making financial and legal decisions for the company.

Most LLC owners use this management structure, and, if you don’t specify otherwise, most states will assign you member-management by default. But there are reasons why a business might prefer to use manager-management.

Manager-Managed LLC

Being manager-managed simply means that the owners of the LLC appoint one or more persons to run the company. This could mean designating one or more members to be managers, hiring manager(s) from outside the LLC ownership, or both.

One situation in which manager-management might be preferable is when some LLC owners want to be investors in the LLC with a more passive role and don’t want to participate in the ongoing decisions, participate in day-to-day management, and daily work involved in the business.

As an example, say you have a family business with you, your sister Tina, and your Uncle Frank. Uncle Frank likes the business idea and wants to put up the majority of the startup capital, but he has other interests and doesn’t really want to mind the store, do inventory, make management decisions about the company, etc. He trusts you and Tina to handle that. And, it’s just as well, since your faith in Uncle Frank’s decision-making abilities has waned ever since you let him pick out the drapes for the front room.

In this case, you could designate Tina or yourself to be the managing member of the LLC. Uncle Frank wouldn’t have management authority, but he’d still maintain his ownership percentage of the LLC.

LLC Management Options

How many members can an LLC have?

LLCs can have an unlimited number of members, meaning some of them can be quite large. In a multi-member LLC with many members, getting all of the members together regularly to vote on every business decision can be challenging.

Consequently, LLCs with a large membership often appoint one or more members (ideally, the ones with the most business expertise) to handle the management of the company or hire a professional manager from outside the group to run things.

Another example: You and some friends informally start a farmers’s market outside your hometown. As you attract more clients, you also attract more farmers who want to be a part of this successful market you’ve created. Before long, you have 30 farmers all wanting to sell their produce along with you, and you all decide that you would collectively benefit from making the market an LLC.

The problem is that none of you feel as confident about business management as you do about growing juicy, delicious tomatoes, and it’s hard to round up 30 people for a vote every time a business decision has to be made. So, to simplify the decision-making process, you hire a professional manager with a business background to handle those aspects of the market.

Put your management plan in writing

LLCs afford you many choices in how to manage your company, but they don’t do you any good if you don’t spell them out on paper. Many states ask you to specify your type of management structure in your Articles of Organization or other formation documents, but, in any state, it’s important to spell out your management preferences in your LLC operating agreement.

Previously we’ve written about the importance of having an operating agreement for your LLC. This vital document establishes the rules for your LLC, including ownership percentages, how profits are divided, what happens when one owner wants to leave or sell their share of the business, and, of course, how the LLC will be managed.

Having an operating agreement is critical for many reasons, particularly management. If you’re doing member-management, you use this document to establish what the voting rights and obligations of each member are along with other managerial/operational issues.

The same applies to the manager-managed structure, more so if you’re hiring a manager from outside the LLC. Without an operating agreement, how will you establish how much authority the manager has? Will the manager make all decisions for the company, or will some, such as hiring and major purchases, be reserved for the LLC owners? If these questions aren’t answered at the start, they may be determined by the state later if conflict arises, and there’s no guarantee you’ll like their decision.

Creating a comprehensive operating agreement for your LLC can be intimidating, but we can help with that. We offer a guided, customizable template to help get you started. Our chatbot walks you through the process of creating your agreement and allows for e-signature of the document.

We can help

Now that you know more about the issue of a manager-managed vs. member-managed LLC, you may be closer to forming your own limited liability company. If so, our business formation services can help. And, our operating agreement template can help you forge a document that sets down the rules for how your LLC will be managed. Chat with one of our business professionals today to learn more.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.