After registering your business as an LLC, you have one more crucial decision to make. It’s whether you want to set up your management structure as a member-managed LLC vs manager-managed LLC.
A member-managed LLC means the owners have combined control over business decisions. On the other hand, a manager-managed LLC assigns one or more elected professional managers to make company decisions.
1. Member-Managed LLC
A member-managed LLC gives management authority to the owners of the LLC. The owners are called “members” or “agents”, and each member can offer input in company decisions. However, depending on the details in the operating agreement, the owners may have an equal or varying say.
For example, a partner who owns 50% of the LLC may have twice as much say as a partner who owns 25% of the LLC. In addition, member-management is the standard structural designation in most states. This means that if you don’t specify in your LLC’s articles of organization or operating agreement, each member may be considered a manager.
- All members can contribute to management decisions
- Less complex structure, especially for small businesses
- Excellent solution for retailers and brick-and-mortar businesses
- Can take away owners’ time from strategic decisions
- Harder to raise money from investors
2. Manager-Managed LLC
A manager-managed LLC requires your company to elect a manager or managers to control day-to-day business decisions. However, members still retain authority over some activities, such as dissolving the company. Nevertheless, the manager is the primary legal agent of the LLC and can make quick decisions on half of your company without waiting for approval.
This type of management designation is ideal when an LLC has investors. In this case, most investors are passive investors, also known as “silent partners”. Passive investors own a portion of the business but typically don’t have the time or expertise to help with day-to-day decisions. This is why you should elect the most knowledgeable members to be managers.
- Easy for investors to passively invest in the company
- Makes it more convenient for large LLCs to operate quickly
- Lets elected managers make quick decisions
- Consolidates decision-making authority
- All members don’t have a say in management decisions
- Must carefully document manager authority it operating agreement
- Elected manager may not understand business as well as owners
- Elected manager must earn a salary, making it more difficult for small businesses
Member Managed vs Manager Managed LLC
There are a few key differences between a member-managed LLC and a manager-managed LLC. The following comparison chart will help you decide which management structure to choose.
Member Managed LLC
Manager Managed LLC
Day-to-Day Decision Making
Allows Passive Investment
Ideal For What Size Business
Default Option for Most LLCs
Attracting Qualified Management
Who Are Member-Managed LLCs Best For?
Member-managed LLCs are suitable for companies with a small number of investors who want to streamline day-to-day decisions. This type of LLC management is popular because of its simplicity and flexibility. As such, it shouldn’t come as a surprise to you that member-management is the most common option for owners when creating an LLC.
In addition, this management structure typically suggests that investors must be able to provide assistance in a hands-on managerial role. Although this isn’t always the case, this is great for businesses that want to leave decision-making in the hands of members with an active role in personal investment and engagement.
In essence, member-managed LLCs are the perfect choice for your business if you and the other owners want to play an active role in the company’s affairs. For example, let’s say you co-own an online store with another individual. If you want to create the website while your partner conducts the marketing activities, you should choose a member-managed LLC.
Who Are Manager-Managed LLCs Best For?
Manager-managed LLCs are ideal for larger companies with passive investors. Similar to corporations, manager-managed LLCs allow your company to have passive investors. As such, you can extend membership to individuals who don’t want to take part in day-to-day business activities. You can think of the manager in a manager-managed LLC as a corporate director.
This is also the correct business management structure for businesses with members without management or industry experience. Since designated managers don’t need to be existing members of the LLC, manager-managed LLCs have an easier time recruiting competent management.
We can go through an example to help you visualize how a manager-managed LLC works.
Let’s say you and your business partner receive money from three investors. At this point, you, your partner, and the three investors are members of the LLC since each of you has an ownership stake.
In a manager-managed LLC, all the members can vote to make you and your partner the LLC managers. This way, you and your business partner can make quick business decisions without getting the go-ahead from the three outside investors.
A manager-managed LLC is also the right choice if you have a larger business with multiple owners. It may be difficult to assemble everyone to vote on management decisions if you have more than five or six owners. A better strategy is to delegate management responsibility to one or two professional managers.
It’s also important to remember that professional managers are considered employees and must receive a salary for their work. If an individual is both a member and a professional manager, then they can receive a salary for the chunk of time they put into management duties.
LLC Operating Agreement: Finalize Your Business Structure
Your LLC’s operating agreement is a contract between the members explaining how the company will be run and how your company makes important decisions. Examples include how crucial procedures work, how compensation will be distributed, and how the business would like to be taxed.
Operating agreements also indicate which management structure your LLC chooses and discuss the responsibilities amongst members and the allocation of administrative rights. If you don’t detail your management structure, your LLC is at risk when legal issues or other disputes arise.
However, you don’t need to file operating agreements with the state, such as with articles of organization. Nonetheless, having an operating agreement is strongly recommended. Furthermore, you should update the operating agreement as your company grows.
How Do I Create an Operating Agreement?
It is very difficult to create an operating agreement from scratch without legal experience. Instead, we recommend following a template or step-by-step instructions found online on legal help websites.
However, the best way to create an operating agreement is with the help of a business registration service, such as ZenBusiness. These LLC services are catered toward LLCs and offer many services, including the creation of operating agreements based on a series of questions.
IT can also help you get the right business license based on your business structure, location, and industry type. Furthermore, since LLCs require you to nominate a registered agent, ZenBusiness offers registered agent services as well.
FAQs for Member-Managed vs Manager-Managed LLC
Before you head out, let’s go over a few common questions we receive about LLC management structure:
Bottom Line on Member Managed vs Manager Managed LLC
Choosing the correct LLC management structure is easy once you understand both options, member managed, and manager managed. Choosing a member managed LLC is your best bet if you have a small business with a few owners. Conversely, larger businesses with passive investors should opt for a manager-managed LLC.