Once you plan for the formation of a Limited Liability Company, it is your responsibility to decide whose name will go under the management section in the Operating Agreement. Deciding the management structures is not an easy task, especially since the management group will have the authority over the company’s functions, including the work, the transaction it is making, and others. It is best to understand member-managed vs. manager-managed LLC for you to decide.
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 authority- 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.
There are many reasons why you might want to change your LLC from member managed to manager managed. For instance, if your company is large enough and has a lot of members, you may want to have one or more managers in charge of day to day operations. If you have investors, you might find that a manager-managed LLC is a more efficient way to raise money.
The main difference between a manager-managed LLC and a member-managed LLC is the type of management structure used. A manager-managed LLC is where the authority is placed in the hands of a professional manager, whereas a member-managed LLC is where the decision making process is left to the members.
Changing to a manager-managed LLC may require you to make a few changes to the Articles of Organization. You might also need to amend your Operating Agreement to reflect the changes. To ensure that the change is a smooth and legal transition, make sure to consult with your attorney before you do anything. Depending on your situation, changing your management structure could be an easy or a difficult task.
The best way to determine whether or not a change is the right move is to assess your business in its entirety. How big is the organization, how many owners and investors do you have, and how much management power will be available to you. It’s a good idea to consult an attorney before deciding whether to go with a manager-managed or member-managed LLC. This is because the difference can be as large as a few dollars, and the legal impacts of a change may be significant.
The main reason why a member-managed LLC is the better choice is that it can provide more flexibility in governance and more control over the future of the business. However, it can also become more complex, and you will need more participation from the members of your organization. In addition, you will need to delegate some of your management duties. Using a manager-managed LLC will give you more time to focus on the more important aspects of your business.
Although there are a few advantages to using a member-managed LLC, you should consider the drawbacks before deciding on a management structure. Changing your management structure from a member-managed to a manager-managed LLC can be a complicated and expensive process, and you might have to do some amending to your operating agreement to make it work. Also, if your business is small, you might not be able to afford to pay for a professional manager.
Finally, it’s a good idea to understand the different management structures and to know which one will be best for your business. In general, the member-managed LLC is a more suitable option for a startup, while a manager-managed LLC is more suitable for a growing company with multiple investors. Once you decide on your management structure, remember to follow the recommendations of your attorney.
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.