LLC Structure – Member Managed vs. Manager Managed: When you form a Limited Liability Company, you must specify the structure of your company. Deciding the management structure is as important as deciding the company’s name. It is not an easy task to decide on the managerial structure. Managers and members, depending on the structure, will have the authority over the functions of the company.
You can have either a member-managed LLC or a manager-managed LLC structure. Depending on this structure, LLCs decide on company decisions, transfer of profits, and overall decision-making. In this article, we develop the LLC managerial structure and related information. Get all the insights into the managerial structure – member-managed vs. manager-managed LLC on this page.
On this page, you’ll learn about the following:
- Types of LLC Management Structure
- Member-Managed LLC Entity
- Manager-Managed LLC Entity
Types of LLC Management Structure
This type of business can be managed by two different management authorities- members and managers.
In the member-managed LLC, the entire team is formed by the members of the business owners of the concerned liability protection company. Here, the members will be responsible for carrying out all the daily operations regarding the business. For drawing out proper strategies, you can consult with GoDaddy and other such firms.
In this type of management structure, the members will appoint a few persons as the managers. These managers are nothing but normal employees. Once they are given the role, these individuals will have complete rights to take the daily decisions and overlook the functioning of the businesses.
Member-Managed LLC Entity
As the name implies, you can understand that in a member-managed structure, it is the owners who will manage the entire business structure. They will be responsible for making all the business decisions, be it deciding the taxation, preparation and filing the legal documents, time management, handling conflict situations, and so on. The owners will have complete authority over the LLC business entity for as long as no change in the management is being brought upon.
Who Are the Members of an LLC?
LLCs can be owned by either a single person or multiple business owners. Whoever will form the company will officially become a member of the corporation. These people will be responsible for forming the LLC operating agreement, and at the time of filing the document, the forms of management should be declared.
Who Has the Ultimate Decision in a Member-Managed LLC?
In member-managed LLC, it is the members who will be responsible for making the decisions. They can either share the rights equally or based on the percentage of ownership. The member having higher shares in the company will have more say as compared to one with lesser shares.
When to Form a Member-Managed LLC
The members can play an active role in the management structure of the LLC only when the corporation has a few members involved. Also, make sure that all the participating members are on the same page in terms of handling the duties for day-to-day operations. Companies like GoDaddy will help you a lot with the formation process.
Pros of a Member-Managed LLC
- All the members will have equal rights over every management decision to be taken in the LLC.
- It is a less complicated structure since there will be no separate management level.
- This is the perfect structure for every brick-and-mortar business.
Cons of a Member-Managed LLC
- With day management, the owners will not get enough time to focus on another strategic side of the LLC.
- Raising money from investors is very difficult.
Manager-Managed LLC Entity
In the manager-managed business structure, the people will have the authority over some of the main domains of the LLC, like dissolution, day-to-day operations, financial transactions, and so on. The decision-making power rests in their hand, and hence, they don’t need approval from the members to bring any change in the LLC structure.
Who Are the Managers of an LLC?
When the members decide not to intervene in the management system of the corporations, they appoint normal employees as the managers of the LLC. These managers are answerable to the boards of directors, which consists of both the members and the investors. Managers are nothing but the non-members of the LLC who are given all the rights to operate the business on a daily basis.
Who Has the Ultimate decision in the Manager-Managed LLC?
In this kind of management control, over 70% of the power rests with the managers employed by the members. However, there are certain cases where the manager will need permission from the members to proceed, like in preparing and approving certain organization documents, managing the taxation, and so on.
When to Form a Manager-Managed LLC?
When the size of the LLC is huge with a number of business owners, the manager-managed business structure is the ideal one to consider.
Pros of a Manager-Managed LLC
- Investors play a passive role in the manager-managed platform, and hence, such structures gain continuous cash flows.
- This particular management company style allows the members to focus on more important aspects, like the expansion of the LLC, preparing the operating agreement, and so on.
- Issues can be solved easily since the manager management doesn’t need the approval of all the members.
Cons of a Manager-Managed LLC
- Members couldn’t interfere in the decision-making process in such a business structure.
- The manager role needs more business knowledge for operating the Limited Liability Company (LLC), which is not always possible.
Can you change from member managed to manager-managed?
Yes, you can change the management from member managed to manager managed by making amendments in the Article of Organizations.
In a member-managed structure, decision-making authority rests with all the members of the organization. This model can work effectively for small businesses or those with a cohesive group of like-minded individuals who share a common vision. Each member has an equal say in the decision-making process, which allows for a sense of ownership and consensus-driven strategy formulation. This can foster a collaborative and inclusive work environment, encouraging individual participation and fostering innovative ideas.
However, as organizations grow, the member-managed approach might become cumbersome. With an increasing number of members having a say in the decision-making process, it can be challenging to reach a consensus or make timely decisions. This can lead to bottlenecks and hamper organizational agility. Additionally, conflicts of interest may arise, as individuals prioritize personal agendas over the broader organizational goals.
Transitioning to a manager-managed structure can help address these shortcomings. In this model, decision-making authority is delegated to a central management team, typically led by a designated manager or CEO. This shift allows for faster decision-making as there are fewer individuals involved in the process. The manager, with their expertise and experience, can make informed decisions, considering multiple perspectives and long-term goals. This empowers the business to adapt swiftly to market conditions and seize opportunities as they arise.
Furthermore, a manager-managed structure can streamline operations and facilitate clear lines of authority and accountability. Under the guidance of a capable manager, resources can be utilized more effectively, ensuring that tasks are assigned efficiently and progress is monitored closely. This hierarchical structure helps in establishing a structured work environment, maximizing the utilization of skills and expertise across the organization.
However, it is vital to recognize the potential challenges that come with such a transition. Switching from member-managed to manager-managed requires effective communication and transparency. It is crucial for the management team to clearly communicate the reasons behind the change and ensure that the concerns and expectations of the members are addressed. This can help mitigate any resistance or distrust that may arise during the transition.
Additionally, a manager-managed structure should maintain a balance between centralized decision-making and allowing the input and autonomy of the members. It is essential to create avenues for collaboration and feedback, ensuring that the collective intelligence and experience of the members are valued and tapped into. Striking this balance can foster a sense of collective ownership and loyalty towards the organization, even in a more hierarchical structure.
In conclusion, the decision to transition from a member-managed to a manager-managed structure should not be taken lightly. While both approaches have their merit, businesses should carefully consider factors such as their growth objectives, size, and operational complexity. By striking the right balance between individual participation and efficient decision-making, organizations can adapt to changing dynamics, foster growth, and achieve their long-term goals.
Depending upon the structure of the personal Liability Protection company, you will have to decide on the member-managed or manager-managed LLC structure. If the members agree on taking all the decisions, member management is the best choice. However, if you want to handle the responsibility of others and focus on more essential issues, manager management will be ideal.
No, in the operating agreement, it is only the members who will be mentioned as the business owners of the LLC. The managers are normal employees chosen by the members themselves.
While you will draft the operating agreement, make sure to decide the number of managers who will supervise the company. You can either appoint one manager or multiple employees to handle the management responsibilities of your LLC.
When you are forming an LLC you must decide whether you want a member-managed or a manager-managed LLC. For a large business, manager-managed LLC is desirable. Whereas, for a small and mid-sized business, member-managed LLC can be formed. You can get the pros and cons of each structure before your form your LLC.