Structuring your business as an LLC is a great idea – once you’ve made that decision, you’ve still got at least one more crucial decision; you’ll need to choose your management structure. In a member-managed LLC, the owners have control over company decisions collectively. A manager-managed LLC places authority in the hands of one or more elected members and a professional manager. The choice will impact your daily business running, so it’s a good idea to consult an attorney for legal advice.
A limited liability company is a popular business structure offering limited personal liability for business obligations and debts; it’s popular because it’s easy to create and involves less paperwork and administrative burdens. An LLC may have one owner or multiple owners, and sole-owned LLCs are known as single-member LLCs. Things are more complex when a company has multiple owners or investors – in that case, the members can collectively manage the LLC or elect a manager; whoever is in charge of management will make the decisions for the company, including things like:
- Signing agreements and legally binding contracts.
- Buying and selling real estate, vehicles, equipment, and other business assets.
- Opening, managing, and closing business bank accounts.
- Hiring employees and staff members.
- Making important decisions.
- Taking out loans.
The people in charge of management have a lot of power and responsibility; you’ll need to ensure that this power is placed in the right hands – typically, you’d elect manager-management or member-management when you file your LLCs articles of organization. Management authority is detailed in the LLC operating agreement.
A member-managed structure has owners of the LLC (known as members) making the decisions. Each owner has a vote in the decision-making process; depending on the specifics of the operating agreement, the authority may be proportional to the level of business interest, or they may have an equal say.
Members of an LLC may have different voting rights depending on their stake; a Partner who owns 20% of an LLC could have half of the say of a Partner who owns 40%. In a member-managed LLC, each owner has the power to bind Co-Owners by signing company contracts, borrowing money, or making other decisions.
Member-managed LLCs are the more common type and represent the best choice if you and your Co-Owners want to have an active role in the company’s affairs. In most cases, if you don’t specify a management structure, this is the type you’ll have.
In this business structure, the owners elect a manager to handle day-to-day business decisions, and members retain some authority (for example, dissolving the company). Still, the manager is the core legal agent of the LLC and can quickly make executive decisions on behalf of the business without waiting for approval. The manager could be a member (but doesn’t have to be), and there could be one manager or multiple. If the manager isn’t a member, they’re known as a professional manager. The managers act similarly to a Board of Directors. Manager management is more appropriate when an LLC has investors; most investors are passive or ”silent partners” meaning they own a portion of the business but don’t have the time or expertise to make daily business decisions, in which case members may vote for the most knowledgable person to act as manager. In family-owned businesses, it’s common for parents to keep management authority in their hands while entrusting their children with some ownership while they learn the ropes and gain experience.
A manager-managed LLC is helpful if you have a large company with multiple owners – if you have more than five owners of an LLC, it can be challenging to collaborate to make management decisions frequently. It’s better to delegate the responsibility (which could be a full-time job) to members or to a professional manager.
Pros and cons
There are key differences between a member-managed LLC vs. a manager-managed LLC, and the choice impacts your day-to-day operations and decision-making processes, let’s take a look at some of the pros and cons.
Pros of a manager-managed LLC
- Easier for investors to invest passively. Silent, or passive investors, are important.
- Large LLCs can operate more efficiently.
- Allows managers control to make fast decisions without the consensus of all owners.
- Centralises authority.
Cons of a manager-managed LLC
- Owners don’t get to participate in management decisions, and there are no voting rights.
- You’ll need to carefully outline the manager’s authority in the operating agreement.
- A professional manager might not understand the business’s and the owners’ subtleties.
- A professional manager will require a salary, which could be difficult for small businesses.
Pros of a member-managed LLC
- The structure is less complex, especially for small companies.
- Members have a say over all management decisions.
- Excellent choice for retailers and brick-and-mortar companies.
Cons of a member-managed LLC
- Management of the LLC may be a full-time job, which takes away time from other parts of the business.
- This structure makes it harder to raise money from investors.
The type of LLC you have will affect daily operations, including the control members of the LLC have. A manager-managed structure requires an outside manager, whereas a member-managed structure offers a more casual approach to the business’s day-to-day operations. Ultimately, the choice between LLC management structures depends on your precise business; if you have investors, a manager-managed LLC is an obvious choice to centralize decision-making authority.
In a larger LLC with many members, manager-managed may be the best option because it streamlines decisions; there’s no need to coordinate all members on every decision. But for smaller businesses with three or fewer co-owners, it’s easier to divide management responsibility among the owners, and this structure gives owners more say over the future of the business, helping on-the-ground entrepreneurs have a greater say over their business.
LLC members are business owners; they receive distributions from company profits, but they’re not employed; professional managers are considered employees, though, and employees must receive a salary for their work. If someone is a manager and a member, they can expect to receive a salary for the portion of time used for management duties. As with any other employee, you’ll also be responsible for income and payroll taxes. Fortunately, LLCs are very flexible, and only a few tweaks can alter your management structure, be sure to get legal advice or consult your business attorney before making any significant choices.