Member-Managed LLCs Vs Manager-Managed LLCs

    by Benjamin Aronson
Updated August 30, 2021

After some procrastination, you’ve decided to form an LLC. Congratulations on taking the first steps to starting a new business! You have a lot of decisions to make now – which state to form your LLC in, How much will it cost, what your company name should be, and a lot of other choices.

One of the most important decisions you’ll have to make for your LLC is how your company will be managed. You’ll need to make this decision before you register with the Secretary of State.

We’ve put together this helpful guide to show you the choices you have and help you select the one that is best for your business.

Let’s dive in and learn more about LLC management!

What Does an LLC Manager Do?

An LLC manager makes the day-to-day decisions about the LLC. This could include:

  • Opening bank accounts
  • Selling or buying property for the LLC
  • Taking out loans or business credit cards
  • Making legally binding decisions
  • Signing contracts
  • Hiring employees

As you can see, that’s a lot of responsibility! And not only that, but these are also important decisions that can make or break your business.

An LLC manager has a fiduciary duty to act in the best interest of the LLC; however, this is the type of power you don’t want to give to just anyone!

Fiduciary duty means that the person(s) who manage the LLC have a duty to act in good faith in a way that benefits the LLC.

When Do You Have to Decide How to Manage Your LLC?

Deciding how to manage your LLC is something you should do as soon as possible. Usually, this is a decision that you need to make before registering with the Secretary of State and before you begin operating. You typically need to include the type of management in your Articles of Organization. The state LLC application will also usually ask you what type of management you’ll use.

While it is an important decision, don’t fret too much. If you decide to go ahead with one type of management and then realize that it isn’t working for you, the LLC members can vote to change the type of management.

Just be sure to follow the voting procedures laid out in your Operating Agreement and make the proper amendments and filings in your state.

What Happens if I Don’t Decide How My LLC Should be Managed?

The default management in most states will be member management. It makes sense, since the members of the LLC are also the owners.

Amending your filing takes time and money, though, so registering correctly the first time will save you hassle down the road.

Make sure you have a conversation with your LLC members regarding member-managing or manager-managing your LLC.

Things to Think About When Deciding Who Should Manage Your LLC

There are benefits to both member management and manager management. Take some time to think about how you’d like your LLC to run and assign the management accordingly.

We pulled together some of the most important questions to ask yourself before you decide. Answering these questions will make the path much clearer for you.

How Many LLC Members Will You Have?

A smaller management group can allow for quick decision-making.

If your LLC has many members, it might be difficult to get everyone together to make business decisions. And, if you work in an industry where the environment changes quickly, those delays could cost you money and missed opportunities.

In this case, manager management might be a good decision to keep your company moving lean and quickly.

If you have only a handful of members who are all involved in the day-to-day operations of the company, member management could be a great fit for you. Especially If everyone knows what is going on and is up to date on the latest in the industry, it might make for easy and quick business decisions.

How Involved are the LLC Members?

There are many titles that control the direction of an LLC such as CEOs, CFO, COO, and more. While those positions control a business, that doesn’t necessarily mean that they own a piece of the LLC.

Highly involved LLC members are usually broken down by the following main roles:

  • Founders
  • Co-Founders
  • Investor
  • etc.

Those titles have a serious say as to where the LLC will go.

Founders and Co-Founder are the individuals that created the business and poured their sweat blood and tears to create a forward-moving LLC.

LLC investors are individuals or businesses who provide capital and usually aren’t involved in the day-to-day operations of the company.

Some investors might not want to take a hands-on approach, preferring to sit back and let someone else run the business. Those types of investors are often known as “passive investors”.

Other investors prefer being able to make decisions that protect their investments, AKA “active investor.

What is The Expertise of Your LLC Members?

If your LLC has many members, it’s probably safe to say that each of them brings a unique set of experiences to the LLC.

For example, let’s say one member has had past success running a similar business in your niche. In this case, the LLC might decide to let that person manage the LLC under a CEO role. Or maybe a member with in-depth finance or accounting knowledge in relation to an LLC. That member would be perfect acting as a CFO.

On the other hand, perhaps all the members bring important knowledge and business savvy to the table. In that instance, member management could allow for more well-rounded decision-making.

Remember, the manager of the LLC doesn’t even have to be a member of the LLC. It could be someone outside the company who has valuable experience.

Decided to run a member or managed LLC is solely up to the dynamics of your business.

How Much Control do the Members Want to Have?

Members who manage the company themselves have all the control in their hands. But even if you do use a manager-managed LLC model, members still keep important control.

Your Articles of Organization should explain what managers do and what members do. It is especially important to include the following information in your Articles of Organization:

  • Names of LLC members including the percentage of holdings
  • Mangers of LLC if there are any
  • Nature of LLC’s business
  • Address of LLC
  • Registered Agent of LLC
  • Any other essential business-related information that outlines the LLC

Members may still have control over things like who the manager(s) are, what roles they play in the company, and what roles are reserved for members only.

Ultimately, each LLC is so different that there’s not a one-size-fits all approach.

However you decide to manage your LLC, a well-written Operating Agreement will make sure the managers and members are on the same page. It will provide guidance for the management and decision-making of the LLC.

Benefits of Member Management

There are many reasons member management might be best for your LLC.

Skin in the game: First, members are probably the ones who created the company (Founders and Co-Founders. It was their idea, their vision, their dream – and they spent their own hard-earned money to get their ideas off the ground. When members manage a company, they have a big stake in ensuring that the company succeeds.

This can mean that they take extra precautions when making company decisions. After all, they want to ensure the company that they’re invested in remains successful!

Might be easier to operate: Member-managed LLCs are more straightforward, too. Members don’t have to decide if a manager should be replaced or how much to pay them. They don’t have to vote on who should be a manager or make a decision to fire managers who aren’t doing a good job.

Make decisions quickly: If members are all involved in the day-to-day operations of the company, they know what decisions need to be made. They can pivot to make important decisions decisively because they know what is best for the company. In a fast-paced world, staying light on your feet as a business definitely has benefits!

Might be more profitable: If you decide to have a manager-managed LLC, that manager (or group of managers) is going to want to be paid. It’s only fair; however, it could cut into the profits for the members of the LLC.

Benefits of Manager Management

What if you have a great idea for a company, capital to start it up, but not much business experience? Or what if your group of members is very large and it’s difficult to reach a consensus? Enter manager management!

Smaller group of people: When there are many LLC members, the voting and decision-making process can be slowed down. Choosing a handful of people to manage the LLC keeps your company quick-moving and able to react to changes in the market.

Bring in an expert: You’re also free to hire experts to help manage the LLC. Maybe it’s a manager with experience in your niche or someone with financial expertise to keep your company profitable. Even if the members have experience in the business, hiring an expert to manage it can ease some of the stress involved in running the business.

No experience running a business? No problem: With manager management, members don’t have to be familiar with every aspect of running a business. They can let the manager(s) do what they do best.

No hands-on necessary: Some investors simply don’t want to be involved in the day-to-day operations of a company. Manager-managed LLCs allow them to invest their money and let others manage the company on their behalf.

Final Thoughts on LLC Management

One of the benefits to having an LLC, as opposed to a different type of company, is the flexibility that comes with it. This flexibility is displayed in the different types of LLC management available.

Every business has different needs, so it’s important to take the time and think about all the pros and cons for your specific LLC. What works for your business isn’t necessarily going to work for other businesses, and vice versa.

Member-Managed LLCs are perfect for smaller-sized businesses at the beginning of their journey.

Manager-Managed LLCs are ideal for larger organizations with founders that lack business savvy management skills.

Unfortunately, there isn’t a cookie-cutter template for your LLC’s management and you’ll need to think about your business industry and the DNA of your LLC.

As your business grows, you may find that you need to change the way your LLC is managed.

If you feel overwhelmed in this step, we recommend meeting with an attorney to help you with your Operating Agreement.

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