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.
Changing a business structure can be a difficult task. In large organizations, a manager managed structure can be time-consuming, and it can detract from individual projects. It is also possible that the company structure may not attract the attention of potential investors. Here are some reasons why you should consider changing your business structure from member managed to manager-managed:
An LLC is a single legal business. In order to operate, it needs a minimum of one member. However, the maximum number is unlimited. Members own a percentage of the business, similar to shares in a corporation. As the name implies, members manage the business, while non-member managers do not own the company. They are hired by the company’s employees and members. The difference between member-managed and manager-managed management is that in a manager-managed company, no one actually owns the company.
While a manager-managed LLC may be easier to raise funds from investors, it is less advantageous for large businesses. Having several owners may not be beneficial, so it’s better to start a member-managed LLC instead. Smaller businesses that only have two or three owners can benefit from a member-managed LLC because they can divide management powers between the members. Besides, a manager-managed LLC allows you to have passive investors as well.
In addition to being easier to manage, LLCs can be anonymous. In addition, the managers on an operating agreement may be members and can be elected by the members. Manager-managed companies may be more profitable and have less paperwork than a member-managed one. A member-managed company also offers more privacy for its members, but a manager-managed LLC is not always the best option.
Although a member-managed LLC may sound more flexible and hands-on, it can be risky. The decision to switch from member managed to manager-managed should be made carefully. However, it is important to note that there are pros and cons to both types of business structure. One of these factors is how many members you have. The smaller the business, the easier it may be to change to a manager-managed one.
If you have investors, a manager-managed LLC might be best for your business. Passive investors are typically “silent partners” who don’t have the time to be involved in day-to-day operations. When selecting a manager, you should look for someone who has experience in business. This is also a good option for family-owned businesses, as they can keep some control and pass on some ownership to their children.
Can you change from member managed to manager-run? as soon as the decision is made? As a business owner, you must consider how you want to run your business and how much time you’re willing to devote. Changing from member managed to manager-managed will require careful consideration and careful decision-making. And if you’re a single-member LLC, it’s best to stick with a member-managed structure.
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.