Mark Pierce, Esq.
Forming a company as an LLC gives you a variety of decisions to make. For instance, after deciding to form as an LLC, you need to decide how you wish to manage your business. This is necessary in order 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 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. Manager managed LLCs are 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, it would make sense to take on a manager managed LLC structure. It would not make sense for all members to be involved in every aspect of decision making. This would become chaotic, and also increase the length of time for decisions to be made.
- Make quick decisions: Having a manager managed LLC allows the company to respond quickly and 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 an 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 a manager-managed LLCs because you can form anonymously and have the managers on the LLC operating agreement 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 structure you can appoint a manager or a few managers to run the business while the members are free to step away 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. It will require members to vote on every decision, and there is more required documentation. There is also more overhead in order 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. This 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 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 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.
What is the Difference Between Manager Managed vs Member Managed?
The main difference between a manager-managed LLC and member-managed LLC is that manager-managed LLCs 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 that is 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.
Manager Managed vs Member Managed: Which is Right for Your LLC?
If you are running a small LLC then 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 are looking 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.