Member-Managed vs Manager-Managed LLC (Key Differences)
You still have to make a crucial choice after you've decided on an LLC as your company structure, which is whether to choose a member-managed or manager-controlled LLC.
Because the decision is heavily influenced by your business's day-to-day operations, it's critical that you speak with an attorney about it. Here are all of the details
What is an LLC Management?
An LLC is a business structure similar to a corporation that protects its owners from personal liability. Each state has specific laws regarding how an LLC must be managed.
An LLC is led by a group of people known as members. Your members will run the LLC under a member-managed structure.
You won't need to hire an outside supervisor - one of your managers will take care of it.
Instead, each member will be responsible for managing the LLC.
Depending on where you are in the country, the members might also be responsible for managing one another.
Some states, such as California and New York, initially require that all members attend company meetings and vote on decisions.
In contrast, other states don't mandate member participation in the daily management of an LLC at all.
Who is in charge of management has the following options on behalf of the firm:
- Deciding how to use the LLC's assets.
- Hire new staff.
- Approving new business ventures.
- Entering contracts.
If your LLC has only one owner, it will almost certainly be member-managed by default; it will also apply to the scenario if your limited liability company has multiple owners, but no one is selected to run the daily operations.
A member-managed LLC has no appointed managers. You choose whether to run the company on your own or hire someone else to be in charge of daily business operations, but it's up to you.
Speaking with an attorney about how involved other company members will be can help you make this decision.
If you decide that you will manage your company, it's important to understand what you can and cannot do.
Your role as company manager will give you full authority over the day-to-day operations, money management decisions, and other business-related tasks.
As your LLC gains experience, it may take on additional managers with voting power over company affairs.
However, these managers must be elected by the company's original members, not appointed.
Company owners may become manager-managers if they invest in other companies structured as LLCs, but this is more common when they're investing in public companies.
You can change your management structure at any time, and your new managers will take over some of your powers until you recoup them.
You can also elect to be a manager of other LLCs, either jointly with your partners or alone.
Depending on the state rules, a member-managed LLC could immediately appoint managers.
For example, you may name your friend as a manager and agree to share authority and responsibility with them, but this agreement should be made in writing before the company is formed.
Alternately, the members may decide that none want to manage day-to-day operations.
If that happens, they may hire a manager and elect them as the new leader.
However, unlike managers of manager-managed LLCs, this decision must be made at either the company's formation or by later amending the operating agreement.
The number of people needed to form an LLC varies based on your state, but you must have at least two.
Advantages of a Member-Managed LLC
- The members can make decisions by consensus.
- The LLC won't have to pay a fee if it appoints a manager instead of paying annual fees for each member.
Disadvantages of a Member-Managed LLC
- If members do not communicate frequently, the company may run into problems with indecision and lack of direction.
- If there is risk involved, multiple members may not want to take it.
If you and your owners want to take part in the company's operations, this is the finest choice for you.
Let's assume you and another person own an e-commerce company together.
You'd want to be involved with the website development and implementation, as well as marketing and pricing, while your co-owners would prefer to handle these tasks.
Member-managed LLCs are more common than manager-managed LLCs.
In most states, member-managed LLCs are the default management structure.
You're a member-managed LLC unless you pick a management structure in your LLC operating agreement.
If your state does not require a unanimous vote by all owners, you can choose to appoint a manager who will be in charge of making business decisions on the company's behalf.
Most states allow for this type of management structure because managers are often more experienced with running businesses, taking a more objective approach to business decisions.
They don't have the same emotional investment as members with certain projects or employees, so they are better poised to make tough business calls.
An LLC with investors necessitates management. Most investors are "passive" participants, meaning they only own a fraction of the firm.
This implies they lack the necessary knowledge to make day-to-day decisions. Members can choose the most informed individuals to be managers.
Advantages of a Manager-Managed LLC
- The company has one clear direction because a manager is in charge of making day-to-day decisions.
- The LLC will only have to pay a fee for one person because it's not required that multiple owners serve as managers.
Disadvantages of a Manager-Managed LLC
- If the manager leaves or wants out, then there is no way for the members to make day-to-day decisions until they hire a new manager.
- The company may have to pay a fee if they get a new manager, even if the old one is still working for them.
A manager-managed LLC may be useful if you have a big company with many shareholders.
When there are more than four or five owners, getting everyone together to vote on management choices might be tough.
It's better to delegate responsibility for management to several members or an expert manager rather than having one person handle everything.
What Is The Best Choice For You?
The type of management structure best for you depends on your company's size, the number of investors and how involved the owners are in the business.
If keeping all members happy is difficult to do, then appointing experienced managers to take over some or most day-to-day operations may be a better option for you.
Otherwise, if it's just a matter of who gets paid what, then you may want to go with the default member-managed LLC.
However, for a small firm with only two or three owners, dividing management authorities among the owners may be most convenient with a member-managed LLC.
This structure provides entrepreneurs greater involvement in the company's future, which many would desire.
It's important to note that not all states allow for multi-layered management structures like this, so be sure to check your state laws before making any decisions about which LLC structure is best for your company.
Can an LLC Have Two Managing Members?
While it's not unheard-of for LLCs to have two managing members, it complicates the management structure and often leads to conflicts.
Having two managers can make it very difficult for a small company to make important business decisions if they don’t agree.
It may be better to appoint one individual as the sole manager who then hires any needed employees.
What Happens to an LLC When Its Member Leaves?
When a member leaves, the LLC continues its operations without them unless one of the managers manages day-to-day decisions.
If the departing member was the only manager or if their departure makes running the business difficult for other members, it may be in their best interest to appoint another manager or hire an outside manager.
Are Managers of an LLC Liable?
Managers aren't liable for the debts and obligations of the LLC, but they can be held personally responsible if their actions violate any laws or regulations.
For example, members could sue a manager if business decisions meant to limit liability result in creditors pursuing them for personal assets.
Should a Single-Member LLC Be Member-Managed or Manager-Managed?
A single-member LLC can be member-managed or manager-managed.
Each option has its advantages and disadvantages, but if most of your business involves you being directly involved in day-to-day management, then a manager-managed structure may be best for you.
Can an LLC Switch From Member-Managed to Manager-Managed, or Vice Versa?
Yes, a limited liability company can switch from a member-managed LLC to a manager-managed LLC, or vice versa, by amending its LLC operating agreement. The agreement needs to be updated to reflect the desired management structure and the roles of members or managers.
What Is the Difference Between a Member-Managed and Manager-Managed LLC...
The type of management structure that is best for your company depends on various factors, including the number of shareholders and their level of involvement in the business.
If you're not sure which option is best for you, be sure to consult with an attorney or other business professional who can help you start an LLC.