Member-Managed LLC vs Manager-Managed LLC

LLC Management Structures and Decision Making Strategies

When you set up a new LLC you have a choice of two management structures that gives you and the other owners flexibility in running your company. Most LLCs are Member-Managed LLCs, but others can be Manager-Managed LLCs. This article will focus on these two management structures in order to assist you in making a wise business decision on how you want your LLC to be managed based on your circumstances.

Member-Managed LLC

Most LLCs are “member-managed” LLCs. In a member-managed LLC, each member, or owner, has the right to take part in the daily operation of the company and can bind the company in business contracts and transactions or delegate authority to officers (i.e. the President or a Vice President). The members typically participate in the day to day management of the company and their share of the profits is based on their percentage interest in the business. When there are several owners in an LLC, it is advisable to have the member-managed structure of the LLC clearly outlined in the Company Agreement, so that each member knows their rights and responsibilities as well as the rights and responsibilities of the other members.

Member-managed LLC Examples

Manager-Managed LLC

A manager-managed LLC resembles the structure of a corporation. A corporation has shareholders that elect directors. A manager-managed LLC has members that elect managers. In other words, managers are like the board of directors. Members, in a manager-managed LLC, share in a percentage of the LLC’s profits and elect the managers, but they do not take part in the day to day management of the business. Members cannot bind the company into contracts or secure loans for the LLC.

Managers, however, handle the management decisions and shape the direction of the business through their decisions. Managers can be (and typically are) members. The managers have the authority to operate the LLC on a day to day basis (or delegate day to operation to officers like a President or CEO). Sometimes a Company Agreement will let the managers make most decisions without oversight, but some decisions are carved out and reserved to the members. For example, the Company Agreement can specify that the decision to add another member or sell off the business shall require the consent of all members. The managers must be specifically named in the Company Agreement. It is also advised that the manager-managed structure of the LLC be clearly outlined in the Company Agreement, so that each member knows his rights and responsibilities.

Manager-managed LLC Examples

A note about the importance of the Articles of Organization and the Company Agreement

When the LLC is formed in most states, the members can specify whether the LLC will be member-managed or manager-managed in the company’s Articles of Organization. It is a wise business decision to use the Articles of Organization to establish the LLC’s management structure upfront to avoid confusion about who is authorized to act on behalf of the company. Then use the LLC’s Company Agreement to clearly define each member’s rights and responsibilities.

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