Forming an LLC means you will be provided limited liability protection for your personal assets. But when deciding to form an LLC, you also must decide on the management structure. This is done when drafting the LLC operating agreement, and in many cases, members fully participate in the daily operations of the business. Other LLC operating agreements place managers in roles to handle operations.
All LLCs should have an operating agreement that establishes management responsibilities. One mistake may impact who has management control and what rights the members retain. This is why drafting a good operating agreement is important, and working with a lawyer might be extremely helpful.
What is a Manager Managed LLC?
Manager-managed LLCs are a lesser-used system. Despite this, it can be useful if you want your startup to run more like a corporation. In this situation, owners of the LLC exercise their control by voting on company issues. Instead of being actively involved in the day-to-day operations. This doesn’t work for every LLC but is a good option for some.
If your startup is large or with a number of members, it is not always practical to have everyone involved in every decision. In a manager-managed LLC, there is the ability to change quickly or make quick decisions, without heavy administrative burdens. You can also use outside counsel, and request help from non-members with expertise to make decisions.
Because all members are listed publicly, it can also help you to maintain more anonymity. Rather than putting the focus on one individual. Passive ownership is also a benefit, offering members a less active role in the business. This makes it possible to have one or more managers handle the affairs of the company, while the others do less on the sidelines.
What is a Member Managed LLC?
Referring to a member-managed LLC is the default type of LLC. The members or owners of a member-managed LLC are responsible for the day-to-day operations. Only certain members run a manager-managed LLC. Member-managed LLCs tend to require each investor to serve in a hands-on position and any member can be involved in any decision.
One advantage of member-managed LLCs is that they are just easier to set up. As compared to a manager-managed LLC, they also ensure that each member can carry out business without limitations. Every single member has control regarding day to day operations of the LLC.
What is the difference between Member and Manager Managed LLCs?
The key difference between that of a member and manager-managed LLC is that manager-managed LLCs can have passive investors. These passive investors can still be written into the business structure. In member-managed LLCs, all owners have a voice that matches their share.
Despite this, LLCs are usually easy to reorganize. This means that if you wish to change the structure you can do so. This means that should you change your mind, you can change the structure of management of your LLC at a later date.
Which is Best for You?
It is good to note that there is no limit to the number of managers you can have. This means that you can define everyone’s involvement, and even let all investors act as managers. Typically though, member-managed best for small businesses that do not need a separate management level to operate.
In some situations, a manager-management structure may be preferred especially when members only wish to be passive investors. In this case, the LLC will delegates management responsibilities, especially when the organization is very large, or some members are not skilled at management.
How to Form an LLC
Here are 7 simple steps to form an LLC.
Step 1: Choose a name for your LLC: Must be unique to your business and contain some variation of LLC.
Step 2: File the Articles of Organization
Step 3: Choose a registered agent: This person or entity must have a physical address within the state of formation.
Step 4: Decide on member vs. manager management
Step 5: Create an LLC operating agreement: These will dictate the rules that govern your LLC.
Step 6: Comply with other tax and regulatory requirements
Step 7: File annual reports
When looking to form an LLC, you are not always required to formally document your choice. Even though many states do ask you to state how your LLC will be set up, whether that is member-managed or manager-managed, and placed in the articles of organization.
Despite this, all LLCs should have a written operating agreement that defines all of the rights and responsibilities of the members. If there are managers, this should also include them as well.
Alternatively, when forming a member-managed LLC, your operating agreement would include things like member voting rights, additional capital contributions, buy-out provisions, and other important management and operational issues. With no operating agreement, you may be in a bad situation if an unexpected situation arises.
When forming manager management for your LLC, you should also spell this out in your LLC's organizational documents. This can be either within the articles of formation, or your operating agreement.
Without an operating agreement, the state laws for your LLC will apply. If you do not necessarily want these rules, then you will need to ensure you have your own written agreement for your LLC. Hiring a lawyer can ensure that you are in compliance with all laws and that your formation documents reflect what you want for your business.