If you are wondering what the difference between a member-managed and manager-managed LLC is, the following information can help you make the distinctions. Anyone who forms an LLC knows that this entity is a great business formation for anyone wishing to enjoy personal asset protection.
You’ve analyzed the different business types and decided to structure your latest business venture as an LLC. Great decision!
Unfortunately, you aren’t done making the decisions regarding the structure of your business. Unlike corporations, an LLC also allows you to avoid double taxation.
Instead, LLC owners pay taxes for their business on their personal tax returns. These distinctions make establishing an LLC attractive to most entrepreneurs and start-up companies.
Now, you must decide if you want your LLC to be a member-managed LLC or a manager-managed LLC.
I can help you form an LLC for your business. Just send me an email at sam@mollaeilaw.com for further details. In the meantime, the following information will help you learn more about a member-managed LLC and how it is different from a manager-managed LLC.
While you can keep reading to understand the difference between the two LLC management structures and hopefully decide which one works best for you.
You can also contact me at sam@mollaeilaw.com if any of this seems confusing and I would be happy to help you.
Here is important outline in order to make more simple for you!
- Difference between a Member Managed LLC and Manager Managed LLC
- Defining a Single-member LLC
- Defining a Multiple-member LLC
- Member-Managed LLC Defined
- How Does a Member Managed LLC Work?
- Manager-Managed LLC Defined
- How Does a Manager Managed LLC Work?
- Document Your LLC Structure as a Member or Manager
What Is the Difference between a Member Managed LLC and Manager Managed LLC?
The difference between a member-managed LLC and manager-managed LLC is how the LLC is managed. While a member-managed LLC is managed by the members of the LLC, a manager-managed LLC is overseen by a manager.
While the above definition seems obvious, the reason for creating each structure is much more detailed.
Defining a Single-member LLC
To further understand these arrangements, you need to learn more about the LLC itself. The LLC, or limited liability company, features owners known as members.
An LLC may be made up of one member or more than one member. When the LLC is made up of one member, it is referred to as a single-member LLC.
Defining a Multiple-member LLC
When an LLC is made up of more than one member, it is known as a multiple-managed LLC. Just like other businesses, an LLC must have one or more people manage the company, similar to how a board of directors presides over a corporation.
An LLC may opt for member management or choose to hire a professional manager. I can help you decide what type of management system will work best for your LLC.
Just contact me at sam@mollaeilaw.com with your inquiries. I will be happy to answer your questions.
Member-Managed LLCs is the Typical Choice
When asked whether a member-managed LLC or a manager-managed LLC is a better structure, most business professionals will tell you a member-managed is the better option. In most cases, this is true.
Member-Managed LLC Defined
Just as the name suggests, this LLC means the members share the responsibilities of running the business. This is the more common approach because small businesses have limited resources and need the members to pitch-in to function properly.
LLCs come with a streamlined structure that doesn’t require boards of directors and upper management. So, LLCs are ideal for a group of people who want to be directly involved in all aspects of the business.
If you want to run your own business from start to finish with your members, member-managed LLC is the right choice.
In most states in the U.S., an LLC is defined as a member-managed business by default. In these states, you must go an extra step to designate management if you want your LLC to be manager-managed in the Operation Agreement you file with you form the LLC.
You can contact me at sam@mollaeilaw.com if you need help writing up your operating agreement.
How Does a Member Managed LLC Work?
A member-managed LLC works by allowing all the members of the LLC to participate in making decisions for the company. Therefore, each member has a vote in what goes on in the business.
While each member can make company decisions, loan agreements and company agreements must be endorsed and approved by a majority of the members.
Manager-Managed LLCs Are Ideal in Certain Scenarios
If members of an LLC prefer to take on the role of a passive investor, it wouldn’t make sense to structure as a member-managed business. The same is true if your business is large, complex, or diverse.
A large and complex LLC might be too much for the members to manage without upper management on top of the structure pointing them in the right direction.
Manager-Managed LLC Defined
A manager-managed LLC has one or more individuals designated as the upper management of the LLC. These are essentially the bosses who hold the responsibility for making the decisions and keep things running within the business.
While members can certainly still help with the business, they are directed with where to help and what to do by the designated manager.
Typically, a nonmember is designated as the manager of the LLC.
How Does a Manager Managed LLC Work?
A manager-managed LLC works by relinquishing the decision-making process to a manager or managers. These individuals serve as agents for the LLC.
A manager does not have to be a member of the LLC. Instead, a manager may be a corporation or another LLC, unless the state where the LLC is based sets certain limitations in place.
Member-Managed LLC vs Manager-Managed LLC
To decide whether to structure as a member-managed LLC or a manager-managed LLC, you need to ask yourself whether your business can operate someone on top making the decisions.
Large and complex businesses can’t function as a member-managed LLC because there’s too much going on and it becomes chaotic.
Is a Member Managed LLC the Most Popular Choice?
In most states, a member-managed LLC is usually established by default. Therefore, no manager is chosen and the members serve as agents for the company. When an LLC is operated in this manner, it requires the creation of an operating agreement.
Document Your LLC Structure as a Member or Manager
As stated previously, most states recognize an LLC as a member-managed LLC by default. If you plan on operating your business as a member-managed LLC, this default status isn’t an issue.
In the interest of being transparent and to make sure your business is structured the way you desire, make sure you indicate whether your business is member-managed or manager-managed in your operating agreement when you form your LLC.
Going to plan to establish as a manager-managed LLC, you also need to name the manager in the operating agreement when you file it.
I have extensive experience creating an operating agreement for a member-managed LLC. We can go over the details once you email me. Learn more about this type of contract by directing your inquiries to sam@mollateilaw.com.
What Is an LLC Operating Agreement?
An operating agreement for a member-managed LLC establishes the terms and conditions agreed by the membership of an LLC. Every contingency is included to safeguard the owners in various situations.
This agreement is formed to define what will happen for daily operations and in special situations. For example, the agreement outlines the steps that will be taken if a member leaves the LLC or gets divorced or dies.
The operating agreement also details the duties and responsibilities of each member of the LLC.
Why You Should Create an Operating Agreement for a Member Managed LLC?
While an operating agreement is not legally required for a member-managed LLC, it should be drafted and submitted nonetheless.
If you do not have an agreement in place, you must follow the state’s default language for operating your company. If you have to follow the state’s mandates, you may not like the results.
For instance, the state may require that you divide the profits equally among the members.
Even if you operate a single-member LLC, the operating agreement offers proof that you are not operating as a sole proprietor. It allows you to establish and enhance your professional credibility.
Why a Member Managed LLC Is Often Preferred over a Manager Managed LLC
If you establish your LLC as a member-managed LLC, you will find that the LLC is easier to manage, that communications are more direct, and the LLC costs less to operate.
Cost is not the only consideration. You also have to determine what roles the members of the member-managed LLC will assume.
If your members will be providing services, producing products, or working directly with customers, it is often better to set up an LLC as a member-managed entity.
Member managed LLC are often popular choices among business establishments, such as bakeries, retailers, clothing stores, and restaurants.
When an LLC Should be Manager Managed
Naturally, not all LLCs are designed to be member-managed. In these cases, a manager-managed LLC allows the owners to assume a more passive role. For instance, if an LLC is made up of investors, they will often choose a manager-managed LLC.
This structure permits a manager or management team to make company decisions without the need for a consensus of the membership. This LLC structure is often chosen in situations where there are multiple members and shareholders in a large company.
In Case You Fail to Document Your LLC Structure
In case you fail to establish whether your business is member LLC or manager LLC, you will be forced to comply with the state LLC rules. You must create an operating agreement to avoid this from happening.
What To Do Next
Unless your business venture is complex and diverse, a member-managed structure is almost always the way to go. There, however, is no harm in speaking to an experienced business lawyer such as myself at sam@mollaeilaw.com to exam both options and make sure member-managed is right for you.
Most states will set up an LLC as a member-managed LLC. However, I can help you with setting up your LLC as a manager-managed LLC if that will fit your company’s operating plans.
We can iron out the details – just send me an email with your questions and concerns. Contact me at sam@mollaeilaw.com. Schedule an appointment so we can establish the right structure for your LLC business.
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