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.
Now, you must decide if you want your LLC to be a member-managed LLC or 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 firstname.lastname@example.org if any of this seems confusing and I would be happy to help you.
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 email@example.com if you need help writing up your operating agreement.
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.
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.
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.
If you plan to establish as a manager-managed LLC, you also need to name the manager in the operating agreement when you file it.
If You Fail to Document Your LLC Structure
If 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 firstname.lastname@example.org to exam both options and make sure member-managed is right for you.
Once we figure out how to structure your LLC, I can help you with the operating agreement and any additional paperwork you need to get through to set up your LLC.
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