Two of the first decisions a new business will be faced with are: the selection of a business structure, and an outline of the business’s day-to-day operations. The most popular entity chosen when forming a new business is the limited liability company (LLC). The LLC’s ease of formation, flexibility, and protections afforded to its owners are the primary benefits of an LLC. The LLC entity allows for two different management structures: member managed, or manager managed, and there are pros and cons associated with both options.
The Member-Managed LLC
A member-managed LLC provides that all members share responsibility for the day-to-day operation of the business. Depending on the LLC’s operating agreement, usually this means that any decision will need to be agreed upon by a majority of the members. This can be considered both a pro and a con. If having a say in running the business is important to you, then a member-managed LLC will ensure your vote on any decision in managing the business. However, if not all the members see eye to eye, decisions may become stalled, and efficiency may be impacted. Another negative concerning member-managed LLCs is that they could have a harder time attracting investors who may not want to be involved in the day-to-day management of the business. This member-managed structure is generally most suitable for LLCs with fewer members and every member active in the business.
The Manager- Managed LLC
The manager-managed LLC is a perfect structure for larger LLCs, or those with members that may only want to be passive investors in the business or do not feel comfortable having management responsibilities. In this circumstance, the LLC can be run more efficiently by a manager, or multiple managers, handling the management responsibilities to make the business run more efficiently.
Due to an LLC’s flexibility, this form of LLC can be set up to have many managers, and the managers can be nonmembers or members. Additionally, the manager-managed LLC can add members without complicating how the business will run. If the trustworthiness of a manager becomes an issue, the LLC’s operating agreement can provide a remedy in limiting the power of the manager(s) by reserving that certain decisions must be made by the members. For example, the operating agreement could allow the members to remove and replace a poorly performing manager, or could require that the manager get unanimous membership approval before selling a major business asset
There are cons to having a manager-managed LLC, one of which may be that the manager may want or require a salary, especially if they are a nonmember, creating a cost to the LLC.
Deciding between a member-managed LLC and a manager-managed LLC is an important choice. It should be noted that transitioning from a member-managed LLC to a manager-managed LLC can be difficult depending on the operating agreement. Therefore, it may be more beneficial at the outset of your LLC formation to establish a separate manager role that allows for this flexibility in the future, even if all the members are considered managers.
Regardless of the type of LLC you elect, how your business will be managed will need to be filed with the Secretary of State when registering your LLC and the operating agreement should match.
If you have questions regarding the formation of your LLC, you should consult an experienced business attorney in your area for assistance.
More from Otis and Bedingfield, LLC