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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 make company decisions, transfer profits, and make overall decisions. In this article, LLCBuddy editors 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.
Types of LLC Management Structure
This type of business can be managed by two different management authorities- members and managers.
- Member-managed LLC
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. You can consult with GoDaddy and other such firms to draw out proper strategies.
- Manager-managed LLC
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 make the daily decisions and oversee the functioning of the businesses.
Member-managed LLC
As the name implies, you can understand that in a member-managed structure, the owners will manage the entire business structure. They will be responsible for making all the business decisions, be it deciding the taxation, preparing 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 brought about.
Who Are the Members of an LLC?
LLCs can be owned by either a single person or multiple business owners. Whoever forms 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 form of management should be declared.
Ultimate Decision Maker in a Member-managed LLC
In a member-managed LLC, the members 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 than one with fewer 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.
You can form a member-managed LLC if you’re forming an LLC with your spouse. Having an LLC with spouses needs additional attention, especially in the state where they are forming their LLC. If they are in a community property state, they can form a single-member LLC. But, if they are in a non-community property state, they must form a multi-member or member-managed LLC.
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 the other 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 consist of both the members and the investors. Managers are nothing but non-members of the LLC who are given all the rights to operate the business on a daily basis.
Decision Maker 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 organizational documents, managing 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 a Limited Liability Company (LLC), which is not always possible.
F.A.Qs
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.
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 Articles of Organization.
Many LLCs start as member-managed entities, with each member having a say in the direction of the business. This structure works well for small businesses where all members are actively involved in the operations and want to maintain control over strategic decisions. It fosters a sense of teamwork and collaboration among members, ensuring that everyone has a stake in the success of the business.
However, as the business grows and becomes more complex, some LLCs may find it beneficial to transition to a manager-managed structure. In a manager-managed LLC, designated managers are responsible for making important decisions on behalf of the members. This can be advantageous for businesses that require specialized expertise or have members who prefer to focus on specific aspects of the business.
One of the key benefits of moving to a manager-managed structure is the ability to streamline decision-making processes. With designated managers in place, members can trust that experienced professionals are handling day-to-day operations, freeing them up to focus on other aspects of the business. This can lead to increased efficiency and productivity, as well as a clear chain of command in place to handle any challenges that may arise.
Additionally, a manager-managed structure can offer more protection for members who may not be actively involved in the business. By entrusting day-to-day operations to managers, members can limit their personal liability and ensure that professionals are handling the business affairs. This can be particularly important for LLCs with passive investors or members who do not have the time or expertise to be involved in the daily operations.
Ultimately, the decision to switch from member-managed to manager-managed structure will depend on the specific needs and goals of the LLC. It is important for members to carefully consider the benefits and drawbacks of each structure before making a decision. Communication among members is crucial during this transition process, as it is important to ensure that everyone is on the same page and understands the reasons behind the change.
In conclusion, while member-managed LLCs offer a collaborative approach to decision-making and operations, manager-managed structures can provide more efficiency and expertise in managing the business. By weighing the pros and cons of each structure and closely communicating with other members, LLCs can determine the best path forward to ensure the long-term success and growth of the business.
In Conclusion
While forming an LLC, it is extremely important to have a proper structure. Whether member-managed or manager-managed, it should be decided before you file your formation documents. For a large business, a manager-managed LLC is desirable. Meanwhile, a member-managed LLC can be formed for a small or mid-sized business. This page has covered all the necessary points you need to know about the LLC structure. Share your feedback with us in the comment section below.