Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
When forming your company’s business structure as a limited liability company (LLC), you must consider how you will designate the management structure.
Options include utilizing a manager or using your members to manage your company.
You should also fully understand the difference between the following:
- What is an LLC manager?
- What is an LLC member?
Let’s dive into each one so you can decide what the best move is for your company.
What is an LLC Manager?
It’s essential to understand the difference between a member and a manager in this context.
Member: An LLC member who owns a part of the business. Each member (owner) typically makes some form of capital contribution to stake the company’s startup operations. This contribution could be services, funds, equipment, or office space.
Each LLC member has some form of stake in the success of the business. Members share voting, profits, and other rights stated in the LLC agreement.
Manager: An LLC manager can be an owner or someone hired by the owner(s).
If you don’t want to run the day-to-day activities of your LLC, then you can hire a manager to do that for you.
A manager in this context is similarly defined as the general definition: a person given the responsibility of administering or controlling the business dealings, activities, and other day-to-day aspects of a business.
This means an LLC manager handles the daily operations of your business.
You have the option of choosing one of two management structures when forming an LLC. You can choose to have the members operate the business or hire a manager (or several managers) to run the business.
If you’re personally involved with the day-to-day operations, then you would choose the member-managed option. On the other hand, you can remain passively involved by hiring a manager.
Every LLC begins being managed by members by default. You can change the role designation to the managed structure when starting the LLC or at any time in the future.
Should You Hire an LLC Manager?
Does your company need a manager? The answer to this question depends on several factors:
- Number of owners (members)
- Passive investors
- Company growth patterns
- Multiple locations
- Required skills and expertise
Examining these factors in more detail will show the benefits of having an LLC manager.
Reasons Why You Should Hire LLC Managers
Limitations on the number of members inside an LLC don’t exist. This helps when you need to bring in additional members for funding, for example. However, having too many members can bring problems to the organization as well. When the various owners can’t make decisions without conflict, it might make sense to designate a single member as the manager.
Some of your members may have invested funds or equipment into the business without having the skills or desire to operate as active members. In this case, you can select other members who have the skills to run the business as managers actively.
As time progresses, your member-managed LLC will experience company growth. As the day-to-day operations become more complex, choosing members to become day-to-day managers might make sense. Alternatively, you can hire a manager from outside the organization.
It’s nearly impossible to manage a business with multiple locations on your own. Since you can only be in one area at a time, you can place managers at your company’s other sites. Those people then take care of daily operations at their specific location, such as handling inventory, hiring new employees, and employee training.
Not everyone possesses the skills required to manage a business or other people. You might need to hire managers if you and the other members cannot handle daily operations.
The company’s growth may also dictate the need to bring new people in as managers because you don’t have the skills to help the company stay profitable during growth spurts.
Thinking through personal business skills becomes more important when you’re operating a single-member LLC. If you are the sole LLC member of your company, you must wear all multiple hats, such as:
- Product fulfillment
You need to become great at everything to do with attracting customers, performing customer service, delivering the product or service, handling tax or legal situations, and many other essential duties. This typically becomes too much for one person to handle as the company grows.
For example, while you initially might handle sales and marketing at the start of your business’ history, you may not be able to keep up with product fulfillment. Then, while trying to rectify this issue, you will be unable to focus on sales, making that area suffer as well.
These issues can throw your business into a repeating loop, and in this scenario, you must seriously consider bringing on a manager or two to assist you.
Reasons Why You Shouldn’t Hire LLC Managers
If you’re running a relatively small business, possess the required skills to run it, and enjoy the process, then there’s no need to bring in managers to do it for you.
Many start businesses because they love the work required. Those persons desire to stay actively involved with the company’s day-to-day decisions and have the skills to run operations without causing significant complications. Such persons don’t need to hire managers.
Smaller, family-owned companies may also not need an LLC manager. Such companies typically cover the different roles a manager would take care of by assigning a family member to each one. If everyone can work together efficiently and help make daily decisions, there’s no need to designate a manager.
A third scenario exists for those who started the business with one or more co-owners. If all members get along well and can operate the business well together, a manager may not be necessary.
How to Designate Your LLC Management Structure
It’s simple to designate an LLC’s management structure. Simply check the box that indicates your desired selection on your state’s LLC formation documents. You’ll then lay out all the details about the member and manager responsibilities inside the LLC’s operating agreement.
Later, you can file paperwork with the state if you want to switch to the other type of management designation. If you do make that switch, then make sure you update the operating agreement as well.
How to Remove a Manager From Your LLC
Disputes, retirement, death, or other situations sometimes make it necessary to remove managers from the LLC.
For instance, if a manager engages in wrongful behavior, the other managers or members can remove that person or entity from the LLC using a legal process called “derivative action.”
Typically, a corporate attorney helps LLC members remove managers during this type of situation. A court action may become necessary if a manager engages in activities that:
- Use a business opportunity for personal profit
- Breach fiduciary obligations
- Fail to maximize shareholder value
It’s crucial to think ahead so that you can easily remove managers if necessary. Members’ rights should include the ability to remove managers – be sure to list this in the operating agreement at the company’s startup.
The Last Word
LLC managers are an important role in any business, you just have to make the decision if you want that role to be yourself, another owner, or someone else you hire to keep you organized.
Filed under: Advice Columns