Member Managed vs Manager Managed LLC - Which Structure Fits Your Business?
By Bazal Razzaq
Updated: August 02, 2023
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- What is an LLC?
- How to change your LLC name in 2023?
- How to set up an LLC as a Non-US resident
- What Is A Foreign LLC?
- Mastering the Art of Maintenance: Things To Do After Setting Up An LLC
- Exploring the Basics: What is a Single Member LLC?
- The Power of Partnership: Unleashing The Potential of A Multi Member LLC
- C Corp vs LLC – Which Business Structure is Right for You?
- A Guide to Business License: Everything you need to know
- Unlocking the Benefits of an LLC (Limited Liability Company)
- Which is the best state to form an LLC in?
- Operating Agreement 101: A Key To A Successful LLC
- One LLC, Multiple Streams of Income: can you have multiple businesses under one LLC?
- Articles of Organization Made Easy: Everything You Need to Know
- What Is A LLC Annual Report: A Comprehensive Guide for Business Owners
- Exploring Eligibility: Who Can Be LLC Members?
- What Is A Domestic Limited Liability Company?
- What is An EIN, and Do You Need One?
- What is a Series LLC?
- How to start a business with no money in 6 steps
LLCs come in different shapes and sizes, and when forming an LLC, one of the major decisions you’ll make is choosing the correct management structure.
Some companies have one person single-handedly running the entire business. In contrast, others are managed by large groups where many members/owners can’t share equal roles and authority in business management. That’s where management structures come in! The above-cited examples have two different names that best suit an LLC regarding goals and size: Member Managed LLC and Manager Managed LLC.
What is a Member-Managed LLC?
A member-managed Limited Liability Company is a type of business structure where all the members/owners actively participate in the management and decision-making of the company. You can think of it like a group project where everyone gets to decide everything together. Depending on the operating agreement, the owners might have an equal say or authority proportional to how much of the business they own.
In this type of LLC, each owner can act on behalf of the business, meaning they can sign contracts, borrow money, oversee day-to-day activities, and make other choices that affect the company. But before any major decisions are made, all the owners must agree by voting.
A member-managed LLC is a good choice if:
- You have a small business with limited money, assets, and resources.
- There are only a few members/owners who have enough experience, expertise, and skill.
- All members/owners want to actively participate in operational activities and decisions.
Now that we’ve discussed what a member-managed LLC is and when it can be the perfect choice for a business let’s closely understand the advantages and limitations of the management structure.
Pros of Member-Managed LLC
- Direct Control: All members/owners have a say in how the business is run, promoting transparency and inclusivity in decision-making.
- Quick Decisions: Because fewer people are involved, agreeing on things and taking action is usually faster.
- Informal: There’s a lesser need for formal meetings and procedures in this management structure, making things easy and simple.
- Close Knit Support System: People work closely together, which can help build strong teamwork and trust.
Cons of Member-Managed LLC
- Limited Expertise: Not everyone may bring quality to the table, o important decisions might not always be correct.
- Slower Growth: With everyone so deeply involved and invested, it might be a bit harder to grow quickly or take on bigger opportunities.
- Possibility of Conflicts: Fights, disagreements, and confusion among the members/owners could slow down progress or create tension.
- Time-Consuming: Managing and making critical decisions can take a lot of time and effort, which may get challenging for busy members.
What is a Manager-Managed LLC?
In a manager-managed Limited Liability Company, the members/owners elect a manager or different managers to handle day-to-day business operations and activities. However, the members/owners would still have authority over multiple factors, like dissolving the LLC. The manager(s) would still remain the main legal agent of the LLC and could make decisions for the company without consulting and waiting for members’ approval.
This management structure is best for LLCs seeking investors and/or silent partners for their business. Usually, the investors own a certain portion but are too busy or lack enough expertise to handle the company’s day-to-day operations.
A manager-managed LLC may be suitable if:
- The business is vast and complex.
- The members/owners require more experience, expertise, and skill.
- All or many members/owners have no interest in actively participating in operational activities and decisions.
Let’s take a closer look at the pros and cons of a manager-managed LLC so you can make an informed decision.
Pros of Manager-Managed LLC
- Professional Management: With managers in charge, the LLC can benefit from experienced and skilled individuals making important decisions.
- Stress-Free Environment: The members/owners can focus on their own jobs or other things they like, knowing that their capable managers are handling the business.
- Scalability: If the company grows and expands, bringing in new managers or investors is easier without changing the ownership structure.
- Set Roles: The distinction between owners and managers is clear, reducing confusion about who is responsible for what.
Cons of Manager Managed LLC
- Costs: Hiring professional managers may increase operational expenses, affecting overall profitability.
- Communication: Sometimes, there could be a gap between what the members/owners want and what managers do, leading to misunderstandings.
- Dependency on Managers: If the managers are not capable or trustworthy, it could negatively impact the company and its reputation.
- Less Control: The members/owners give up some control to managers, which might not be ideal if they want to be very hands-on and involved.
Member-Managed vs Manager-Managed: How To Choose
Choosing between a member-managed and manager-managed LLC depends on various factors and considerations. Let’s break it down:
- Size and Complexity of the Business: A member-managed LLC might be suitable if your business is relatively small and straightforward. However, a manager-managed LLC may be more appropriate to ensure efficient operations if your business is large and has many moving parts.
- Members’ Involvement: Consider the level of involvement each member wants in the day-to-day operations. A member-managed structure could work well if all members wish to actively participate and make decisions together. On the other hand, if some members prefer a more hands-off approach and focus on their own expertise, a manager-managed setup might be better.
- Management Expertise: Assess the management skills within the ownership group. If the members lack sufficient experience and knowledge to run the business effectively, a manager-managed structure with professional managers could be beneficial.
- Decision-Making Efficiency: Member-managed LLCs usually have a more straightforward decision-making process since all members are involved. In contrast, manager-managed LLCs may streamline decision-making, making it more efficient in larger organizations.
- Scalability and Attracting Investors: If you plan to grow your business and attract outside investors, a manager-managed LLC might appeal to investors, as it provides a clear management structure.
- Flexibility: Consider the flexibility you need in your business. A member-managed LLC can be more agile and responsive to changes, while a manager-managed LLC might be less flexible but offer stability through professional management.
- Communication and Trust: Analyze the communication dynamics among the members. A member-managed structure might foster better collaboration and trust among owners due to their direct involvement in decision-making.
In the end, there is no one-size-fits-all answer. Each business is unique, and the right choice depends on your specific circumstances and long-term goals. It’s important to discuss the options with other members/owners and seek legal advice to make an informed decision that best suits your LLC’s needs and goals.
The Role of LLC Operating Agreement
Even if the choice between a manager-managed and member-managed LLC is crystal clear, you should still have an operating agreement in place. A well-drafted operating agreement outlines and highlights how the business is run and the roles, rights, and responsibilities of the members/owners. Managers and employees. It also includes the allocation of profits and losses and how the disputes will be resolved in case of legal battle or litigation.
Moving back to the topic, an ideal operating agreement should indicate which management structure the LLC has chosen and how the members/owners and managers intend to behave and function in the arrangement. Additionally, writing down how your LLC is set up and all the important details are useful, especially if any problems or arguments arise.
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Frequently Asked Questions (FAQs)
A member-managed LLC is run directly by its members/owners, who are actively involved in decision-making. In a manager-managed LLC, professional managers handle day-to-day operations, and members may have a more hands-off role.
Outside investors often prefer a manager-managed LLC as it offers a clear separation between ownership and management, providing a structured role.
While not mandatory, seeking legal advice is highly recommended to ensure you understand the legal implications and can make an informed decision that aligns with your business goals.
You should consider factors like the size and complexity of your LLC, the level of management and expertise among members/owners, expansion plans, and the desired balance between control and delegation.