Most small business owners know that limited liability companies (LLCs) are legal structures that protect owners from personal liability for company debts. However, many individuals don’t realize that LLCs can have two different management structures: member-managed and manager-managed.
With a member-managed LLC, all members (which is how most states refer to owners of an LLC) take part in company management and operations equally. Similarly, each agent has a vote in important decisions and can make determinations on behalf of the company. Still, contracts and loan agreements tend to require majority approval.
On the other hand, with a manager-managed LLC, only certain members, non-members, or a combination of the two control business operations. The other members act as passive investors who don’t have a vote in operational decisions. While both options offer great benefits, such as pass-through taxation and legal protection, they also have some significant differences that can affect your company’s success.
Choosing the Right Structure for Your LLC
While both member-managed and manager-managed LLCs can work for your new business, it’s important to consider your company size and needs before making a decision.
Member-managed LLCs allow all members to share in the decision-making process. Unlike big corporations and manager-managed LLCs, the member-managed groups don’t have officers or boards of directors. Because they don’t require a separate management level, member-managed LLCs tend to cost less to operate, making them more popular among small businesses.
Budgetary factors aren’t the only concern when choosing an LLC’s management type. Agents should also consider the role they plan to play in future company operations. If your members intend to create goods, provide services or otherwise work directly with your customers, you should set up your LLC as a member-managed organization. For this reason, member-managed LLCs are popular among retail shops like bakeries, restaurants and clothing stores.
Not all businesses are suited to the member-managed structure. A manager-managed option is preferable if its owners wish to take a more passive role. For example, LLCs with investor members often select the manager-managed structure. This structure enables a dedicated manager or team to make decisions without a consensus from all shareholders.
This option is particularly valuable for large companies with multiple members and shareholders. If you have a large number of members, making decisions as a group can be difficult if not impossible. By creating a manager-management structure, you can streamline this process and ensure operations remain efficient, even if all shareholders can’t get together in one location for a vote. Additionally, this option frees up the members to focus on those aspects of running a business that matter to them.
Where Manager-Managed LLCs Work Best
Along with allowing members to do the work they choose, a manager-managed LLC can protect companies from members who lack managerial talent or know-how. By selecting a smaller, more experienced group to manage the company, you can protect your business’ interests as well as your investors’ money.
Additionally, a manager-managed LLC can be ideal for family businesses. Using this business structure, parents can bring children into the business as passive members without giving up control of company operations to them. Doing this allows families to grow their wealth without requiring children to be involved in the management of the company. Similarly, a manager-managed structure is probably best for LLCs where family member investors don’t want to be involved in business operations.
Finally, a manager-managed LLC offers certain benefits with regard to company perception. In some cases, investors worry about important decisions being made by multiple LLC members. By selecting a few knowledgeable delegates to make business decisions, LLC owners can reassure investors that their money is in good hands.
Additionally, manager-managed LLCs can offer shareholders a sense of protection. Although all LLCs protect their members from liability for business debts, a manager-managed company offers another layer of protection in the form of a board of decision-makers.
Mind Your Paperwork
It’s important to note that most states set up LLCs as member-managed groups by default. If you want your LLC to be manager-managed, it’s crucial that you file the correct paperwork with your state government. Otherwise, you might be required to include all members in decision-making.
If your members want to take part in the daily operations of the company, the member-managed option might be ideal. On the other hand, if your members are participants in name only, a manager-managed LLC might be preferable. If you’re having trouble deciding, consider where you see your business in a few years, and whether or not you want to be in it for the long haul.