Member-Managed LLC vs. Manager-Managed LLC (Key Differences and Pros & Cons)
When you start forming your LLC, one of the first questions you need to answer is how you want to structure it? Often this can be a confusing question for new business owners unfamiliar with business management (member-managed or manager-managed LLC). So, let’s see if we can clear this up for you and help you decide which structure is right for you.
- Jump to Pros & Cons of Each LLC Management Style
- Choose Your Management
- Member-managed LLC
- Manager-managed LLC
- Member-managed LLC Is the Default
- What are LLC Members?
- What is an LLC Manager?
- Member-managed LLC Pros and Cons
- Manager-managed LLC Pros and Cons
- How Are LLC Managers Compensated?
- Management and Single-Member LLCs
- The Majority of LLCs Are Member-managed
- Manager-managed LLCs and Binding Contracts
- What Is an LLC Authorized Party?
- When Should You Select Your LLC’s Management?
- Operating Agreements and Notarization of Both Member and Manager-managed LLCs
Choose Your Management
If you’re forming an LLC, you need to decide what type of management you want. The members can manage the LLC themselves, or they could hire a manager. You’ll need to consider which arrangement is best for your situation.
Generally, small LLCs will choose a member-managed LLC. This is a management system in which the members can make everyday business decisions for the LLC as well as making agreements or entering into contracts for the LLC. This is the most common form of management for small LLCs.
The other choice for managing your LLC is a manager-managed LLC. In this option, the members choose one or more persons to run the business, make decisions for the LLC, and enter into contracts or agreements for the LLC.
In this management style, the members vote to select the managers for the LLC, and they can vote to change the managers. However, once the managers are chosen, the members no longer make everyday decisions for the business or enter into contracts for the business. Members have a passive role in the LLC once they choose the managers.
A manager-managed LLC is a good choice for large LLCs or for members who don’t have the time required to properly manage the day-to-day affairs of running the LLC.
You may need to specify which form of management you have chosen in your LLC formation documents. However, not all states require this.
Member-managed LLC Is the Default
If you are forming your LLC in a state that does not require you to list the type of management, the state statute will be in effect if your LLC does not have a signed operating agreement. The state default for an LLC is member-managed. However, one way to make sure your LLC has the type of management you want is to draw up a signed operating agreement.
What are LLC Members?
LLC members are the owners of the LLC. An LLC can have as few as one member or as many members as the LLC wants. There is no upper limit on the number of members. Although, if you want your LLC to be taxed as an S-Corp, it can only have up to 100 members. Also, a member can own any percentage of the LLC, and different members can own different percentages of the business.
What is an LLC Manager?
An LLC manager is someone chosen by the members to run the LLC and enter into contracts and agreements for the LLC. An LLC manager’s position is regulated by your state’s LLC laws, so the manager is bound by the state’s laws when performing his or her duties.
Since the LLC manager is in charge of the LLC’s daily operations and can bind the LLC in contracts or agreements, there are a number of specific things the manager can do. An LLC manager can hire employees or independent contractors, obtain loans, and open a business bank account.
They can also dispose of business assets, make investments, as well as making other financial decisions. However, they are legally required to act in a way that furthers the interests of the LLC.
Member-managed LLC Pros and Cons
In a member-managed LLC, all of the members have the right to make management decisions. They can participate in the daily running of the business, enter into contracts for the LLC, and make financial decisions. If the members don’t want to participate in the business, they can choose a manager for the business. This can be either a member or a non-member.
Member-managed LLC Pros
Member-managed LLC Cons
Manager-managed LLC Pros and Cons
Sometimes not all of the members of an LLC want to participate in managing the business but don’t want to hire a non-member either. In this case, the members can elect to have a manager-managed LLC with one or more of the members acting as managers.
If the members elect not to manage the LLC, they can have a non-member manage it instead. The members vote on who will manage the LLC and then let them take over the day-to-day operations of the business as well as any other financial decisions. It is also possible to have a manager-managed LLC that has both members and non-members as managers.
If you’re worried a manager might not always make decisions that you would approve of, you can have a requirement in your operating agreement that a manager must get approval for any major decisions. You can specify in the operating agreement what constitutes a major decision as well.
It would also be a good idea to include what percentage of members need to approve of any major decisions . You could require a simple majority for some types of decisions and a super majority for particularly serious decisions such as bankruptcy.
Manager-managed LLC Pros
Manager-managed LLC Cons
When deciding whether a member-managed or manager-managed LLC is the best choice for your business, you’ll want to consider the size of your business. If your LLC is large, you’ll probably want it to be manager-managed, either by members or non-members.
If it’s member-managed, having so many people have the authority to make decisions could make running the business very confusing. It could also be difficult getting everyone to agree on business decisions. A professional would have management experience and probably do a much better job.
How Are LLC Managers Compensated?
If you elect to have a non-member act as a manager for your LLC, you will need to pay the person a fair salary. Also, since the manager will be an employee, you will need to withhold payroll taxes.
You could also choose to have one or more of the LLC members manage your LLC. If you do this, the member will receive a salary and a portion of the LLC’s earnings.
Since, as a manager, the member is an employee and earns a salary, you will need to deduct payroll taxes. In this situation, the management duties should be explicitly laid out in either an employment agreement between the member and the LLC or in the LLC’s Operating Agreement itself.
Management and Single-Member LLCs
For most single-member LLCs, a choice for manager-management offers few advantages. For this reason, most single-member LLCs opt for member-management. However, these LLCs can still opt for manager-management.
There are two reasons a single-member LLC’s owner may choose manager-management over a member-managed structure. The first is to keep their role as owners private on the formation documents by listing themselves as the manager. This way, it is unclear whether the manager is the owner. In this case, the founder would still own and operate the company in the same way. However, they will need to lay it out in the operating agreement, which can be kept private.
The second reason is to make a succession of management easier should the original owner fall ill or pass away. By having a formal manager role and laying out a successor in the operating agreement, the role can quickly and easily transfer when necessary.
The Majority of LLCs Are Member-managed
The majority of LLCs choose member-management for their business structure. This is likely due to its simpler structure and how easy it is for those new to the business to understand.
Manager-managed LLCs and Binding Contracts
With manager-managed LLCs, only the manager of the LLC can engage the business in contracts or formal agreements. Members of the LLC cannot form binding agreements or contracts on behalf of the LLC, assuming they are not the manager. Also, they will not take part in daily operations.
Though members are free to offer the manager advice, they are not required to heed it, unless the operating agreement lays out specific rules for such. Even so, the members of the LLC still possess the power to remove the manager from their position. It only requires a unanimous agreement from the members to remove a manager and appoint a replacement. Specific rules for this procedure will be contained in the LLC’s operating agreement.
What Is an LLC Authorized Party?
In some cases, an LLC wishes to have an individual who can enter into agreements and contracts on behalf of the LLC, but they do not want them to be either a member or manager of the LLC. This is possible, and the individual is referred to as either an authorized party or, in some cases, an authorized individual.
An LLC can grant this authority by either adopting a resolution or an authorization agreement. By granting authority using this means, the authority it grants is generally far more restricted than with an LLC manager. By consulting an attorney, an agreement can be crafted that grants only the authority your LLC is interested in.
When Should You Select Your LLC’s Management?
It is important to select your LLC’s manager before starting operations. This is because your LLC’s operating agreement should identify the manager as well as how decisions regarding the LLC will be made.
If this is left out, you may leave yourself open to legal issues down the line. Also, in some states, the names and addresses of any managers are required in the Articles of Organization as a part of registering your LLC.
Operating Agreements and Notarization of Both Member and Manager-managed LLCs
For both member-managed LLC operating agreements as well as operating agreements for manager-managed LLCs, notarization is unnecessary. As soon as the agreement is signed by all of the members and/or managers, it is fully legally binding.
Though it is not required, notarization can strengthen the integrity of the document if it is ever questioned. This could make a big difference if it comes to court.
One of the most important decisions you can make when forming your LLC is its management structure. Will it be managed by all of its members through a member-managed structure or by one or more managers outlined in the operating agreement? Now that you know the differences between these two options, hopefully, you can more easily choose the option that is right for your business.