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?
One common question we get is: Can you change from a member-managed LLC to a manager-managed one? This type of LLC structure is great for businesses that have many owners, but want to retain their benefits. But it also can make the decision-making process more difficult because the owners will be involved in every decision. To change from a member-managed LLC into a manager-managed one, you will have to amend the Articles of Organization so that all members will have equal say in its management and decision-making processes. You will also need to modify the Operating Agreement and file Form LLC-5 with the California Secretary of State.
Changing LLC structures is not a difficult process, but you should consider your business’s needs before making any big decisions. Every type of business structure has its own advantages and disadvantages, so it’s important to understand which one will work best for you. For example, a four-member LLC might include Bob and Barbie, who bring the money, but don’t want to be involved in the day-to-day operations. The managers are Bob and Barbie, who find properties and oversee the renovations. While the owners don’t own the company, they are a part of the management of the business.
While it can be tempting to switch from a member-managed LLC to a manager-managed LLC, there are some major disadvantages to each. The main difference between a member- and a manager-managed company is that the former is easier to set up for smaller companies, and the latter requires much less administrative work. However, it may not be as advantageous as switching to a management-managed company.
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.