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.
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.
To illustrate how a member-managed LLC works:
Example 1: ABC, LLC (a member-managed LLC) has four members. One member owns 40% of the LLC and the remaining three own 20% each. If ABC, LLC wants to take an action that requires a simple majority, the action would be authorized if (a) all three 20% members consent or (b) the 40% member along with one 20% member consent to the action.
Example 2: ABC, LLC (a member-managed LLC) has ten members each owning 10% of the LLC. If ABC, LLC wants to take an action that requires a simple majority, the action would be authorized if six members consent to the action.
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.
To illustrate how a manager-managed LLC works, let’s look at two examples:
Example 1: ABC, LLC (a manager-managed LLC) has four members with each member being a manager (four managers). One member owns 40% of the LLC and the remaining three own 20% each. If ABC, LLC wants to take an action that requires a simple majority, the action would be authorized only if three of the four managers consent to the action.
Example 2: ABC, LLC (a manager-managed LLC) has four members and one manager (elected by the four members). In this scenario, the four members are essentially passive investors. Yes, they control who the manager will be, but the manager makes all the decisions (unless of course some decisions are specifically reserved to the members in the Company Agreement).