The Limited Liability Company (LLC) business structure has become very popular with small business owners who want to protect their personal assets, enjoy tax flexibility, and have options for how they manage their company.
An LLC with more than one owner (member) is called a multi-member LLC, and it can be managed in one of the following two ways:
- Member-managed LLC, in which all members participate in running the business.
- Manager-managed LLC, in which only certain members, designated nonmembers, or a combination of the two, handle running the business.
Before an LLC begins to do business, it’s critical for its members to decide on its management structure. The company’s operating agreement should describe who will manage the day-to-day operations and how business decisions will be made. Having a detailed operating agreement helps avoid misunderstandings and potential legal problems.
Before deciding on the management method for an LLC, it’s essential to consult an attorney and accountant for expert guidance on the tax and legal implications. Below is some basic information about the differences between the two options to better prepare you for your conversations with your legal and tax advisors.
Most multi-member LLCs choose the member-managed LLC option. In a member-managed LLC, all members participate in the decision-making process and the work of the company. Significant decisions, such as entering contracts and securing loans, must have approval by a majority of an LLC’s members.
Most states consider an LLC to be member-managed unless specified on the company’s Articles of Organization. While states don’t require one, a member-managed LLC should have an operating agreement that explains each member’s responsibilities in running the company, each individual’s decision-making authority, and how profits should be distributed among members.
Situations When the Member-Managed Management Structure May Be Preferable
- If an LLC’s members want to be actively involved in the company’s work—i.e., producing, selling, or supporting the production and sale of the company’s products or services.
- If an LLC has limited resources and does not want or can’t support a management level between the business and its owners.
Possible Downsides of a Member-Managed LLC
- Management of the business requires a lot of time and energy, which may take away from owners’ ability to work on strategic decisions.
- Investors might not be as interested in funding a member-managed LLC than they would a manager-managed LLC.
In a manager-managed LLC, members relinquish the authority to manage the operation of the business to whoever they designate as the manager or managers. The members in a manager-managed LLC typically make high-level decisions (such as entering contracts, signing loans, etc.) for the business, but they do not get involved in day-to-day tasks or issues.
An LLC’s members can serve as managers, but the manager(s) may instead be other individuals hired by the LLC or another LLC or corporation (if the state allows for that).
Note that although an LLC’s members may be chosen as managers, the manager role in a manager-managed LLC is not an ownership position. A manager—including any member that is designated as manager—gets compensated as an employee of the LLC. The employment income that a member earns as a manager is separate from that member’s status as an owner.
An LLC’s Articles of Organization must specify that it will operate as a manager-managed LLC, and it should have an operating agreement that defines the roles and responsibilities of its managers and members.
Situations When the Manager-Managed Management LLC Structure May Be Ideal
- If an LLC with more than one member has owners that want to invest financially in the business but do not want to be involved in the details of running the company.
- If an LLC’s members don’t have extensive experience running a business–by hiring someone with the operations expertise they lack, they can enjoy the perks of having their own company and feel confident that it’s in capable hands.
- If an LLC has many members, it could be difficult to get multiple owners to agree on everyday business decisions; having a manager to handle operations removes the need for consensus of all members on every small detail involved in running the business.
- In a family business in which the parents want to involve their children in the company but don’t want to give up strategic decision-making.
Possible Downsides of a Manager-Managed LLC
- It might be challenging to determine how much authority to give the manager.
- Some or all owners lose control over management decisions.
- A manager that’s not an owner may not have as strong an understanding of the company’s vision and values as a member who serves as the manager.
- Paying a manager may create a financial hardship for a new LLC.