Member-managed LLC vs Manager-managed LLC: What You Need To Know

Deciding to form a Limited Liability Company (LLC) for your business structure can help you set up the right foundation. Be it a small or a medium-sized business, an LLC enables you to take advantage of the liability protection afforded to its owners

After you choose a name and Registered Agent for your LLC, one of the next things to decide is how your LLC will be managed. There are two types of management for LLCs: Member-managed LLC or a Manager-managed LLC.

Which you'll decide largely depends on the size of the business and the level of independence the owner(s) wants in managing daily operations. 

For instance, you want to start an LLC in Florida. You can start by naming your LLC and hiring a Registered Agent in Florida. Next, you'll want to decide if you want your LLC to be Member-managed or Manager-managed.

LLC Management

Again, there are two types of LLC management: a Member-managed LLC and Manager-managed LLC. As the name suggests, a Member-managed LLC is a structure where the Members, i.e., the owners, handle the LLC daily. On the other hand, a Manager-managed LLC is a structure where a manager, or a group of Managers, runs daily operations and enters into contracts on behalf of the LLC.

The LLC can choose between the two management structures. Regardless, a person responsible for managing an LLC can take the following decisions on behalf of the business:

• Make legal decisions about the business
• Make financial decisions about the business
• Enter into agreements and contracts on behalf of the LLC
• Open a bank account for the LLC
• Arrange financing or debt for the business
• Hire employees, staff, and independent contractors for the business
• Buy and sell assets for the LLC

What is a Member-managed LLC?

A Member-managed LLC is when the owners have the power to manage the LLC, enter into contracts for the LLC, and handle the day-to-day operations of the LLC. Most small businesses choose a Member-managed structure due to their small size and the level of control the owners want to have over it.

Member-managed LLC: By Default 

Suppose you form an LLC in a state that does not specify the management structure in the documents filed for its formation. Further, there is no signed Operating Agreement.  

In that case, the state statute would apply to the business. In such a scenario, the state, by default, usually assumes the business to be a Member-managed LLC.

What is an LLC Member?

An LLC Member is the owner of the business. There is no limitation on the number of Members an LLC can have. An LLC Member can own any percentage of the business. All states allow an LLC to have one Member or multiple Members.

Pros and Cons of Member-managed LLC:

The pros and cons of Member-managed LLC are as follows:

Pros

• All owners have a say in daily business operations.
• It is easy to manage small businesses under this structure.
• This is the most common type of LLC management.

Cons

• There are really no cons to this management structure, however, if one person wants more management control, then you should consider a Manager-managed LLC.

What is a Manager-managed LLC?

A Manager-managed LLC is an LLC where one or few designated Managers handle the day-to-day operations of the LLC. These Managers can also enter into contracts on behalf of the LLC.  

In this structure, the owners expect the designated Managers to make decisions related to the day-to-day management of the business. The owners (Members) are not active in the day-to-day management of the business.

The owners can select the designated Managers responsible for managing the LLC and they have the power to remove them. Once the Members choose the Managers, they expect them to manage the LLC.

There are some LLCs that also have some Members as the Managers. The business needs to specify the management structure of the LLC and must list the information in the LLC formation documents in some states. 

Additionally, there are two types of LLC Operating Agreements generally drafted. Once specific to Member-managed LLCs and one specific to Manager-managed LLCs. So you'll want to choose the correct template to work from and then edit anything that needs to be specific for your business.

The LLC formation documents are usually called the Articles of Organization. However, they may also be called Certificate of Organization or Certificate of Formation, depending on the state. 

Some states allow you to choose internally between the two management structures. In these states, you don't need to include management info in the documents you file to form the LLC. Instead, the management would be chosen, and explained, in the LLC's Operating Agreement.

What is an LLC Manager?

An LLC manager is a designated person that LLC Members have authorized to enter into contracts on behalf of the LLC and handle the daily operations of the LLC. 

An LLC manager is not the same as a usual general manager or a procurement manager, in the traditional sense. Instead, an LLC manager is a position governed by state LLC laws that specifically have to do with the internal affairs of an LLC.

Pros and Cons of Manager-managed LLC

The pros and cons of a Manager-managed LLC are as follows:

Pros

• It may be easier for investors to invest in such a business structure.
• It is suitable for medium and large businesses.
• As the decision-making process is with a single or a group of Managers, the decision-making is often more streamlined and efficient.
• Managers have active control of the business without interference from Members or owners.

Cons

• All owners of the business cannot participate in day-to-day business operations.
• The manager’s authority needs to be defined clearly in the Operating Agreement.

Final Words

While you can change the management structure of your LLC at a later date, it's easier to figure it out up front. One must consider how much control and authority the LLC Members (owners) want.

If all the Members of the LLC want full control and authority, then a Member-managed LLC is usually the way to go. On the other hand, if the Members want to delegate their authority to one, or a few, designated Managers – and they prefer to take more of a "back seat" role – then a Manager-managed LLC is usually the way to go.

Author Bio:

Matt Horwitz is the founder of LLC University, a website that teaches people how to form LLCs. Matt is the leading authority in LLC education and is featured in CNBC, Yahoo Finance, Entrepreneur Magazine, and the US Chamber of Commerce. Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. LLC University®, established in 2010, was the first company to create free LLC courses in all 50 states.