Differences Between Manager-Managed and Member-Managed LLCs

When forming an LLC, you need to choose between member managed vs manager managed LLCs. This decision can be crucial for your business, so it’s essential to know the differences between these two types of companies and which one will suit your business. This article addresses the management structure of each to aid you in deciding which is best.

Let’s compare these two LLC management structures in detail.

Member Managed vs Manager Managed LLCs

A limited liability company (LLC) is a business structure in which the owners aren’t personally liable for the company’s liabilities or debts. LLCs are hybrid entities that blend the features of a corporation with those of sole proprietorship or a partnership. (You can find out more about forming an LLC here.)

When you consider the big step of establishing an LLC, you must decide between a member-managed LLC vs manager-managed LLC, which should be noted in the LLC’s Articles of Organization or another similar state document.

If you choose a member-managed LLC, all the members/owners operate the business. But if you decide to go with an LLC manager-managed, only designated members or outsiders (or both) are responsible for running the business—other members are passive members who aren’t involved in the business operations.

Member-Managed LLC

A member-managed structure is a more common type of management in many states. All members/owners participate in the decision-making process and share the responsibility of managing the business daily. For example, an LLC’s operating agreement includes details about the members’ responsibilities, but owners of a member-managed LLC have a management voice equal to their ownership share.

Management led by its members is less expensive for the business, making it a popular option among small businesses. This structure is also standard with single-member LLCs and owners who contribute by providing services themselves. If you want to work directly with clients, a member-managed structure is the best choice.

Pros

• Straightforward.
• Ensures that each owner of the LLC has a voice in the company’s operations.
• Works exceptionally well with smaller companies that have only a few owners or less and who express interest in participating in its day-to-day operations.
• Advantageous LLC management structure for a startup if you want each member to have significant input in the business’s operations.
• Costs less than hiring one or more professional managers.

Cons

• Daily management required by the members can distract from individual members’ desired projects within the company and can be time-consuming.
• The member-managed structure can make it challenging to raise money from investors since there is no role to offer passive investors in your company.

Manager-Managed LLC

In a manager-managed structure, there are separate management positions for handling the company’s day-to-day operations. The owner of the LLC can also be the manager, or the company can hire someone from the outside. If the company has several owners (multiple members LLC), they decide which functions are given to the managers LLC and which they keep for themselves.

The owner(s) have responsibility for high-level decisions—such as mergers and capital raises—while the manager(s) perform tasks required to run the business, including (but not limited to) entering contracts on behalf of the company, writing checks, hiring, and firing.

Choosing a manager-managed structure needs to be specified in the Articles of Organization and the LLC operating agreement. In an LLC management structure, managers can be members or non-members, typically chosen because of their excellent business sense.

A manager-managed structure is a good choice for an LLC with several members—with some members who will not only be involved in decision-making processes but also wish to invest.
(Choosing the most popular LLC services can help you with any concerns you might have.

Pros

• Provides more streamlined management.
• Accommodates passive investors.
• Highly qualified managers.
• Better outside investment opportunities.

Cons

• Requires more detailed documentation.
• More expenses to pay the salary of a professional manager.

Manager-Managed vs Member-Managed LLC – Which Suits You?

Management led by a manager is preferable in certain situations, especially when certain members want to be only passive investors in the business. These owners frequently are more comfortable if the LLC delegates management responsibilities to one or more of the other members or non-members.

A manager-managed LLC structure is more suitable if your business is too large, complex, or diverse to share management among all members efficiently. And if some members aren’t particularly skilled at management, a manager-managed structure can ensure more competent management of the business.

Hiring a non-member as a manager can be a great option because LLCs that appoint managers often rely on one or more of their own members to fill the role. But if you have a small business with limited resources and don’t need a separate management level to operate, then a member-managed LLC structure is ideal for your company. All members of the company can share responsibility for the day-to-day operation of the business. If your managing-member LLC wishes to produce and sell products, provide services, and take orders, you should choose the member-managed structure.

LLC member-managed structures are used by default under state law in most states. So, if you don’t choose a management structure for your LLC in your operating agreement, it will be considered a member-managed organization.

Key Takeaways

Director-Managed LLCs

Since we’ve covered these types of LLCs, let’s proceed with the third type of LLC: the director-managed structure. In this type of structure, a board of directors has the authority to make business decisions. Still, if there are several directors, the majority must make decisions or changes, including adding or removing directors. And a director doesn’t have to be a member of the LLC.

Certain decisions require a unanimous vote by the members:

• Amending the operating agreement if the LLC documents do not state the method of amendment.
• Amending the Articles of Organization.
• Returning property or money paid in violation.
• Admitting a new member.
• Using property belongings to pay for a charging order (a court-authorized lien on distributions made from a business).

Conclusion

Once you’ve decided between member-managed vs manager-managed LLC management structure, it is essential to put everything in specifics about the structure, members, and responsibilities of the operating agreement. Having this information in written legal documents can prevent potential conflicts and eliminate confusion about everyone’s responsibilities.