Business Formation Business Structure Legal Tips for Entrepreneurs
July 13th, 2015
Member vs. Manager Managed LLC
Your LLC Management Structure Options.
When you form an LLC, you must decide between two management structures: either a member-managed LLC or a manager-managed LLC.
Member-managed LLCs are most common. As the name suggests, the member or members of the LLC all participate in the management. For many small businesses and for entrepreneurs or LLC members who are actively involved in the day to day operations of the business, this type of management structure makes the most sense. It does not require an additional level of management. And it allows the people who are most involved in the business to be making all of the management decisions.
In most states, member-managed LLCs will be the default structure. This means that if you do not designate the management structure in either the Operating Agreement or your formation documents, the state will assume it is a member-managed LLC.
When is a Manager-Managed LLC Preferable?
In some situations, it is better to have a manager-managed LLC. This is particularly true where certain members of the LLC are passive or inactive members, perhaps only providing funding while completely remaining out of the day to day operations of the business. In this instance, it can make better business sense to designate the active members of the LLC as the managers. You can choose one or several managers.
Selecting a manager-managed LLC structure may also make sense where the members of an LLC are too numerous to allow all members to participate in management, and where certain members are either not interested in management or without the business or managerial skills to manage the LLC. Designating key members with the requisite skill and ability to manage as as the managers of the LLC can greatly improve the success of the business.
Whatever your choice, it should be properly documented as required by your state. Amongst other things, the Operating Agreement for your LLC should clearly define the rights and responsibilities of the members and managers, where managers are used. You might define how the managers are selected, the length of the manager/s’ term, and how managers may be removed. Additionally, you should set out the scope of authority given to managers, and define the rights and responsibilities of the managers so that all members are clear on how decisions will be handled by the LLC. Creating as much clarity up front for all members involved will help to minimize disputes down the road.
For more information on Business Formation, see these blog posts…..
DISCLAIMER: THE INFORMATION PROVIDED IN THIS POST MAY CONTAIN LEGAL INFORMATION, BUT DOES NOT CONSTITUTE LEGAL ADVICE. NO RELATIONSHIP, INCLUDING ATTORNEY-CLIENT RELATIONSHIP, HAS BEEN FORMED AS A RESULT OF THIS POST. YOU ARE ADVISED TO SEEK THE ADVICE OF AN ATTORNEY LICENSED IN YOUR STATE IF YOU HAVE ANY QUESTIONS.