One of the most crucial managerial decisions you’ll make when creating an LLC is whether you run it as a member-managed or manager-managed business.
Your decision depends on several factors, including your business type, model, and the number of owners.
And there’s another factor to consider. What do you value more, time or control?
Because while a member-managed LLC gives you control, it takes your time, whereas a manager-managed gives you time but takes control!
Let’s examine the pros and cons of member-managed vs. manager-managed LLCs, so you can decide which is best for your business.
The LLC structure is popular with small to medium business owners due to the ease of formation, limited liability protection, and management flexibility.
There are 2 mains types of LLCs, single-member, and multiple-member. LLC owners are known as members but can also be employees when providing services to the business for compensation.
Members can choose to manage their LLC together or hire a manager to run it for them. An LLC manager runs the daily operations of the business, can make critical decisions, and take the following actions without conferring with an LLC’s members:
LLC manager duties can include:
As you can see, an LLC manager holds the keys to your business, so you must choose yours wisely.
New LLCs include their management decision on their articles of organization when forming an LLC and filing it with their state. And define the management duties, operations, rights, and responsibilities in their operating agreement.
Many states have different regulations, so contact the Secretary of State’s office where you’re forming your LLC to find out more.
Member-managed LLC is the default designation in most US states, so you don’t need to choose it when forming your business. A member-managed LLC means all members handle the daily organizational operations of their business.
Each member has managerial power relative to their percentage ownership, so if an LLC has 2 owners, each with 50%, they’ll have an equal say.
Multi-member LLCs with over 2 members with varying percentage ownerships can outline the managerial rights, such as voting and financial decision-making in their operating agreement.
Before choosing a member-managed LLC status, consider the pros and cons:
The member-managed structure suits single-member LLCs and multi-member LLCs with a small number of owners with equal ownership percentage.
But what if you’re a multiple-owner LLC?
Here’s where the manager-managed LLC could suit your business.
A manager-managed is where an LLC’s owners’ hand over managerial duties to a designated manager, relieving themselves from the daily running of the business.
The manager-managed structure is less common than a member-managed LLC as many small to medium business owners like to keep control, and it isn’t the default structure in most states.
Control is an essential factor to consider when mulling the question of “member-managed vs. manager-membered” because when you designate a manager, you relinquish most of it.
However, LLC members keep the right to dissolve their business and sack their manager, but neither is an attractive proposition.
Maybe now you’re asking, “can a member be a manager” yes, they can. And it’s a great option for multiple member LLCs as you aren’t bringing in an outside manager (known as a professional manager) with zero investment in your business.
The pros and cons of a manager-managed LLC:
The manager-managed LLC structure suits multiple owner LLCs with many members or investors. And business owners with expansion plans but little time for daily management duties.
The answer to “member-managed vs. manager-managed LLC, which is best for you”? Comes down to the LLC management structure that best suits your business model and current situation.
Okay, that’s a given. But it’s also true, so go slow when considering a member-managed or manager-managed LLC and consider all the factors and implications.
Here’s a recap of the management structures and some FAQs to help you make the right decision for your business:
There’s no set rule, and the “should” depends on if an owner wants to keep control and run the daily business activities or delegate a more experienced professional manager.
An LLC can have unlimited managers. But multiple managers could become numerous complications.
Managers aren’t liable for an LLC’s debts. But could be liable to the LLC if they breach their fiduciary duties or break the operating agreement.
Yes, they do.
LLC managers owe specific duties to an LLC and its members. Fiduciary duty means the manager must act in favor of the LLC, including a duty of loyalty and care.
Managers who breach their fiduciary duties might be liable to pay compensation to an LLC and face dismissal.
Mostly, LLC owners are members but can become employees through an employment agreement that lists them as providing services to the LLC in exchange for compensation.
Most states allow you to switch management structures when you like, and some will require extra paperwork and state filings.
And if you do switch, ensure to update your operating agreement relative to your new management structure.
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.
Terry is a serial entrepreneur with over 25 years of experience building businesses across multiple industries – construction, real estate, e-commerce, hotelier, and now digital media. When not working, Terry likes to kick back and relax with family, explore Taoism’s mysteries, or savor the taste of fine Italian red wine.