When starting your business, one of the first decisions you’ll need to make is how you want your company to be managed. Do you want to be running the day-to-day operations, or put someone else in charge?
In technical terms, you’ll need to decide whether you want to form a member-managed vs a manager-managed LLC.
Today, we’ll discuss the differences between these two options and help you determine which one might be the better fit for your business. 🙌
What Is LLC Management?
First, let’s define what we mean by LLC management.
An LLC stands for a Limited Liability Company, which is a type of business structure that combines the flexibility and tax benefits of a partnership with the limited liability protections of a corporation.
LLC management refers to how your LLC is run and who’s responsible for making those big, important decisions.
A member-managed LLC is one in which all the LLC members (owners) have a say in how the company is run, which means each member has an equal vote and is involved in the day-to-day operations of the business.
How Does Member-Managed LLC Work?
So, how does a member-managed LLC work?
Let’s say you and two friends decide to start a mobile dog grooming business. You form a member-managed LLC and each of you becomes a member of the LLC.
As members, you all have an equal say in how the business is run. This means that you’ll be involved in taking important decisions, like what truck you should purchase, how much each of you will invest, how to allocate profits, who will be in charge of driving the truck, who will groom the pups and more.
In a member-managed LLC, each member also has the authority to act on behalf of the company. This means that if one member signs a contract or makes a business decision regarding how far the truck is willing to drive for services, it’s binding on the entire company.
Of course, this also means that all members are personally liable for the company’s debts and obligations, so if truck payments are delayed, everyone’s liable.
Which Businesses Should Choose a Member-Managed LLC?
Member-managed LLCs are a good fit for businesses with a small number of owners who want to be actively involved in the day-to-day operations of the company. It is also suitable for companies that seek collaborative, consensus-based operational structure among their fellow members.
Advantages and Limitations of Member-Managed LLCs
Now that we’ve discussed what a member-managed LLC is and who should choose this management structure, let’s take a closer look at the pros and cons of a member-managed LLC:
- Shared decision-making: All members have an equal say in how the business is run, promoting collaboration and consensus-building among everyone.
- Greater involvement: Members are directly involved in the day-to-day operations of the business, leading to greater accountability and dedication.
- Lower costs: Member-managed LLCs could have lower individual costs since they’re likely to be invested in by a collective group of members.
- Flexibility: Member-managed LLCs are more flexible, and can bend and change rules as they see fit by updating the LLC operating agreement.
- Pass-through taxation: Like other LLCs, member-managed LLCs are taxed as pass-through entities, which means that they don’t need a separate tax return come tax season: all the business taxes are recorded in the owner’s personal tax returns as opposed to a separate one.
- Conflict resolution: Challenging disagreements between members may ensue, as all members have an equal say in decision-making.
- Limited expertise: With all members having an equal say, decision-making could get tricky when some members are more qualified than others.
- Personal liability: All members are personally liable for the company’s debts and obligations, which can be a significant risk, particularly if there are a few members who don’t have the experience of managing a business.
- Limited scalability: Member-managed LLCs may struggle to scale beyond a certain point as decision-making can become more complex and time-consuming with a larger number of members.
- Less clear division of roles: In a member-managed LLC, it may not be clear who is responsible for specific tasks and areas of the business, which can lead to confusion and inefficiencies.
Now, let’s look at an opposite concept — a manager-managed LLC, where the LLC is run by one or more managers appointed by the members.
How Does Manager-Managed LLC Work?
In a manager-managed LLC, the members have the power to appoint one or more managers to take decisions and manage the business, wherein the manager is then responsible for running the day-to-day operations of the business.
Managers have the authority to act on behalf of the company, like, in our example, signing contracts, hiring more groomers, and figuring out where to go to get their truck fixed; however, the members still retain control over the company and can remove the managers if necessary.
Which Businesses Should Choose a Manager-Managed LLC?
Manager-managed LLCs are a good fit for businesses that have a larger number of members or investors who are not interested in being involved in the day-to-day operations of the business and solely want to contribute as outside investors.
If you don’t have the expertise or experience to manage a business, a professional manager can help you take important decisions and grow your business.
Advantages and Limitations of Manager-Managed LLCs
Let’s take a closer look at the advantages and limitations of manager-managed LLCs:
- Professional management: Manager-managed LLCs can benefit from the expertise and experience of professional managers, taking important decisions and helping the business grow.
- Clear division of roles: Within a manager-managed LLC, it’s clear who is responsible for managing the day-to-day operations of the business — the manager!
- Scalability: Manager-managed LLCs can be scaled more easily than member-managed LLCs, as decision-making is centralized, streamlined, and clear, with no conflict of interest.
- Personal liability protection: Like member-managed LLCs, manager-managed LLCs provide personal liability protection to the members.
- Greater flexibility: A manager-managed LLC can be structured in many different ways, allowing for greater flexibility and customization.
- Cost: Manager-managed LLCs can be more expensive than member-managed LLCs, as they require professional managers and formal management structures.
- Less involvement: Members may not have the same level of involvement in the day-to-day operations of the business as the manager, which could lead to a sense of disconnect or distance from the company.
- Potential conflicts: The managers may not always act in the best interests of the members, which could lead to conflicts in the long run.
- Lack of control: Members may have less control over the business than they would in a member-managed LLC.
- Limited decision-making: In a manager-managed LLC, managers have the authority to take important decisions, which can limit the input and involvement of the members.
The Role of LLC Operating Agreements
Regardless of whether you choose a member-managed or manager-managed LLC, it’s important to have an operating agreement in place. An operating agreement is a legal document that outlines how the business will be run, including the roles and responsibilities of the members and managers, how profits and losses will be allocated, and how disputes will be resolved.
How to Create an Operating Agreement?
An operating agreement should be tailored to the specific needs and goals of your business and should be drafted with the help of an attorney. It’s important to ensure that the operating agreement is legally binding and enforceable.
How Much Does It Cost to Have an Operating Agreement?
The cost of creating an operating agreement can vary depending on the complexity of the agreement and the expertise of the attorney. It could range between $500 and $800.
Decide What’s Best for Your Business with doola by Your Side
With doola, you can make big LLC decisions with the help of a seasoned professional and support system right in your chat box, helping you grow your business with ease and confidence. Form your LLC with doola today and discover whether a member-managed vs manager-managed LLC is the best fit for your business — whether or not you’re that infamous mobile dog grooming service.
Can a member be a manager?
Yes, a member can also be a manager in a manager-managed LLC.
Can you switch the management structure of your LLC at a later date?
Yes, you can change the management structure of your LLC at a later date but take note that it’ll probably require amending your operating agreement and filing paperwork with the state.
Is a single-member LLC member-managed or manager-managed?
A single-member LLC can be either member-managed or manager-managed, depending on the structure chosen by the owner.
How many managers can your manager-managed LLC have?
A manager-managed LLC can have one or more managers, depending on the needs of the business.
Is there a difference in liability between member-managed and manager-managed structures?
No, both member-managed and manager-managed LLCs provide personal liability protection to the members.