When you form a Limited Liability Company (LLC), you will choose between a member-managed and a manager-managed company (“members” are the LLC owners). The difference between the two management structures comes down to who will be responsible for the day-to-day operations. In other words, the difference is whether the owners will manage the daily affairs, or the LLC will bring in a third party who can make decisions on behalf of the company. In many states, you must make a selection on your formation paperwork, and if you do not make a selection, your LLC will default to a member-managed company.
Your choice of a member-managed or manager-managed structure does not dictate how the company’s profits and losses will be allocated among the owners. The owners are free to make those decisions independent of the company’s structure. In addition, members often retain certain rights regardless of the management structure, including major decisions like when to dissolve the company or bring in new members.
LLC owners have flexibility to split other responsibilities in a number of ways. For instance, one member might handle day-to-day management, while another member remains a passive investor. Similarly, a third-party might be responsible for certain duties, while the members retain the right to make other decisions that affect the business. For instance, an LLC might allow a non-member manager to open a bank account for the company, while all members retain the right to decide when the company will distribute profits.
Because LLCs are often small businesses with few owners, the more common selection is the member-managed LLC. With this arrangement, all members have the right to run the business and handle the day-to-day affairs. Every member is an agent of the business, meaning any and all can take actions on behalf of the LLC, such as binding the company to a contract and purchasing property in the LLC’s name. Whether the members must first seek approval from the other members will depend on the operating agreement.
With the manager-managed LLC, at least one of the owners is not involved in the management of the business. The LLC might bring in a third-party to handle the affairs, or one or more members might be a manager. Whenever the LLC involves fewer than all of the members in management, the law considers the LLC to be manager-managed.
In a manager-managed LLC, one or more of the members is a passive investor—someone who might make contributions and take a profit, but does have the authority to make decisions for the business or handle the day-to-day affairs. However, even passive members can retain some authority, such as the ability to add and remove managers. Again, the operating agreement will clarify the rights of all of the members.
Management includes responsibilities that relate to the day-to-day operations of the LLC. A manager is an agent, which means that the company gives the manager legal authority to make decisions for the LLC. Note the responsibility and authority of a manager is different from an employee. An employee might handle the daily operations of a business, but would ordinarily not have the right to sign a contract on behalf of the business.
Your operating agreement can specify the duties that the LLC places on management, and whether the members retain any authority or responsibility. Typically, management includes:
The management structure you choose will depend on how you want to run your business. As mentioned above, most LLCs are member-managed, which does not deprive any member of the power to conduct business on behalf of the company. If you want to limit the rights and duties of one or more members, you can use your operating agreement to clarify the arrangement.
If you have passive investors who do not have any responsibilities, manager-managed might be the better option. In addition, LLCs with a large number of members typically elect manager-managed to avoid the administrative burden of consulting with numerous decision-makers. Another consideration is that some states require you to list the names of all members on the member-managed formation paperwork, which is publicly accessible. If you want to protect the identity of a member, manager-managed might provide this option.
In many states, you must list your decision on the formation paperwork that you file with the state. You might also include your selection in your operating agreement, along with a detailed breakdown of the responsibilities of each member.
You can always change your management structure at a later date. Some states require you to file updated paperwork with the state when you modify your formation structure. If you choose a new management structure, you should also update your operating agreement to reflect the change.