If you're uncertain about the difference between a manager-managed LLC and a member-managed LLC, you've come to the right place. Many people get these two confused and aren't sure which is the right structure for their business.
What is the Difference Between Manager-Managed vs. Member-Managed?
Let's take a look at some of the main differences between these two types of structures:
- A manager-managed LLC allows for 3rd party management.
- A manager-managed LLC can have passive investors. This can be helpful for those members that do not wish to participate but want to contribute monetarily.
- In member-managed LLCs, all owners have control based on how much they own. This would require members to participate a lot more, and not all investors have the time to do this.
Let's say you have 20 members invested in real estate. A manager-managed LLC would allow you to give decision-making powers to a manager rather than forcing all 20 to sign off on every decision.
Forming a company as an LLC gives you a variety of decisions to make. For instance, after deciding to form an LLC, you need to decide how you wish to manage your business. This is necessary to draft the LLC operating agreement. In some operating agreements, LLCs decide to have all members participate in the daily operations of the business. In other LLCs, the operating agreement designates employee managers to run the day-to-day management operations and tasks.
Whatever choice you make in running your LLC, you will need to draft an LLC operating agreement that clearly establishes responsibilities. One mistake could impact the members (owners), and change who has management control, and what rights each member retains.
What is a Manager Managed LLC?
When it comes to a manager-managed LLC, the structure is less common. The manager management structure is essentially how you would run a corporation. Owners of an LLC exercise control by voting rather than running the day-to-day operations. Employees, known as managers, would take a more present role in running the company. This can benefit an organization in many ways.
Advantages of a Manager-Managed LLC
Here are a few of the most common benefits of manager-managed limited liability companies.
- Large Size: If you have a large number of owners, or if the company is generally large, a common choice would be to take on a manager-managed LLC structure. It would not make sense for all members to be involved in every aspect of daily decision-making. This would become chaotic, increasing the length of time for decisions to be made in daily business operations.
- Make quick decisions: Having a manager-managed LLC allows the company to respond quickly and gives the manager legal authority to make decisions that need to be made without delay.
- Hire experts: Hiring experts to work as managers can ensure that the business will run more smoothly. Just because someone is a business owner of an LLC does not mean they are an expert in how it should be run.
- Desired Anonymity: When forming an LLC, most often, all of the members must be listed publicly on the operating agreement. There is more anonymity when it comes to manager-managed LLCs because you can form anonymously and have the managers on the LLC operating agreement handle management duties instead.
- Passive Ownership: This structure provides a situation where investors can put their money into the company and go about their daily life. In this manager-managed structure, you can appoint a manager or a few managers to run the business while the members are free to step away from the management responsibilities and come in as needed.
Disadvantages of a Manager-Managed LLC
Although it is easier to invest in a passive role within a manager-managed LLC, it does not give members as much control. This may not be what all members are looking for. Especially when it comes to a small LLC, this structure does not necessarily make sense. The members will have voting rights and will vote on every business decision, and there is more required documentation. There is also more overhead to pay the salary of a manager.
What is a Member-Managed LLC?
When forming an LLC, a member-managed LLC structure is the default type of LLC. This means that the owners (members) will run the day-to-day operations of the LLC. A member management structure would make sense for a smaller business, a single-member LLC, or a partnership.
Advantages of a Member-Managed LLC
If you want all members to be able to have a voice in the decision-making process of the business, then this is a good option. It can allow the members to take an active role in day-to-day operations. It is also a lot easier to establish this type of structure because it is the default when forming an LLC. It will also cost less in overhead because, in this business structure, you will not be paying a manager (or managers) to run your business.
Disadvantages of a Member-Managed LLC
For a large organization, this structure may be too time-consuming. It can also distract from individual projects in the company. Another disadvantage is that investors may not be interested in investing in your company, because they do not want to take on an active role in running it.
Manager-Managed vs. Member-Managed:
Which is Right for Your LLC?
If you are running a small LLC, you may be more interested in a member-managed LLC. This will keep your costs down and allow you more control of your business. If you want to run your LLC more like a corporation with many members and tiers to the business, then a manager-managed organization might be the best option for you.
How to Form an LLC
- Pick the state in which you would like to form your LLC.
- Name your LLC
- File the LLC Articles of Organization.
- Choose a management structure
- Write the LLC operating agreement
- Obtain an EIN (employee identification number) from the IRS
- Obtain necessary business licenses
Hiring a lawyer can help you choose the right management structure for you. An attorney can also help you draft a legitimate LLC operating agreement, and ensure there are no mistakes that could come back to cause problems for you later on.