When setting up a Limited Liability Company (LLC), one of the key decisions business owners need to make is whether to opt for a member-managed LLC vs manager-managed LLC.
This decision is important because it will determine how your business will run, who has the authority to make decisions, and the entire management structure of your business.
Therefore it is very important to comprehend the features and the differences that these two structures have to make sure that the LLC functions optimally and achieves its rules and objectives.
If you are the type of entrepreneur who prefers daily engagement in running your business as opposed to an investor who wants to take a passive role, then it is important that you choose a management structure that is right for your LLC as it will have an effect on the amplitude of the business for success.
This choice also determines the nature of the relationships between members, the effectiveness of business activities, and even how the business is viewed by its clients or partners.
In this article, some of the most common features and benefits as well as dimensions of concern when choosing the optimal structure for your LLC will be discussed.
What Is a Member-Managed LLC?
A member-managed LLC is a structure where all members (owners) share equal responsibilities for managing the business on a day-to-day basis and making all the necessary decisions concerning the operations of the business.
Most of the operating strategies of LLCs in most states follow this structure. In the US and most countries, an LLC is a member-managed company in the absence of an operating agreement specifying otherwise.
Key Characteristics of a Member-Managed LLC
✅ Active Participation: In the company operations, all members are practically involved. Several specific functions in the running of the company may include control of finances and activities concerning clients and employees.
✅ Equal Authority: Every member has an equally powerful word to say as to who administers the LLC unless the operating agreement says otherwise. This means that no single member is in a position to make decisions without the agreement of the others.
✅ Transparency: Members are kept up to date with the company’s activities and the company’s financial information. Member-managed LLCs are characterized by frequent meetings among the members for everyone to be updated.
Advantages of a Member-Managed LLC
✅ Cost-Effective: Since in this case there is no hiring of a manager, member-managed LLCs tend to be cheaper. The members themselves manage the operations, and therefore, no additional wage bill is incurred.
✅ Direct Involvement: Members get fully involved in making decisions and therefore these decisions are implemented faster and are in line with the business’s plans.
✅ Simplicity: This structure is appropriate for small LLCs with a limited number of members who are ready to participate in the day-to-day running of the affairs of the LLC. It creates a good working environment among the members and is best suited for new businesses or family businesses.
Disadvantages of A Member-Managed LLC
✅ Time-Consuming: A member of an LLC may have other jobs and/or responsibilities, so running the LLC’s routines can be debilitating for them.
✅ Potential Conflicts: However, on the other end, a member of the LLC may not like how their peers run the business as voters of equal authority may have different businesses in mind.
✅ Limited Scalability: Furthermore, this structure becomes less favorable as the demand for members’ expertise and time outgrows their capacity due to the expansion of the business.
What Is A Manager-Managed LLC?
A manager-managed LLC is managed by members who appoint one or more managers to run the daily operations of the company. The appointed managers may be members or not, or both.
This structure is good for companies in which all members do not want to be managers. It also allows the members to be in a more relaxed position as they are active members and not the managers.
Key Characteristics of a Manager-Managed LLC
✅ Delegated Authority: The best managers are hired to run the day-to-day activities making them authorized for decision-making allowing the company to run efficiently: although most importantly in companies that are rather bigger or complex.
✅ Passive Ownership: The passive members are more professionally avid, as their returns become their main attention, this is appealing to most investors as they can focus on the return rather than managing the company.
✅ Defined Roles: The operating agreement indicates quite clearly the roles and responsibilities to be performed by the managers and the members. This clarity decreases the likelihood of misunderstandings or disputes arising.
Advantages of a Manager-Managed LLC
✅ Professional Management: This structure enables and integrates experienced managers in carrying out business operations and performance. This is to say that the company can trust these professional managers to know what is right for the company, hence improving the company and its ability to scale.
✅ Flexibility for Members: Members can make crucial decisions regarding the business or other business concerns and do not have to engage in the routine running of the business. This is especially helpful to members who do not have the time or the ability to run the business.
✅ Scalability: A manager-managed LLC is ideal for more established firms or for companies that have numerous passive investors. It allows for further growth by shifting the day-to-day management and operational functions to other managers.
Disadvantages of a Manager-Managed LLC
✅ Higher Costs: Using qualified managers can be a source of increase in operational cost, which is very limiting for new enterprises or small businesses.
✅ Reduced Control: There is a possibility for non-managing members to find themselves estranged from running the daily activities of the business which makes them dissatisfied.
✅ Potential Mismanagement: If the managers do not manage the company well or do not share the same direction with the members of the LLC, the company may not perform that well. There needs to be supervision and regular follow-ups to eliminate this risk.
Key Differences Between Member-Managed and Manager-Managed LLCs
| Aspect | Member-Managed LLC | Manager-Managed LLC |
|---|---|---|
| Management | All members participate equally in management. | Management is delegated to appointed managers. |
| Decision-Making | Decisions are made collectively by members. | Managers make operational decisions. |
| Member Involvement | High, as members handle daily operations. | Low, unless members are also managers. |
| Operating Agreement | Simplified but must outline decision protocols. | Detailed, specifying manager roles and powers. |
| Best For | Small LLCs with active members. | Larger LLCs or those with passive investors. |
How to Choose the Right Structure for Your LLC
A few considerations to keep in mind while choosing the arrangement between a member-managed or a manager-focused LLC are:
Business Size and Complexity:
For small businesses with a few members, a member-managed LLC is often a simpler option. This structure gives the feeling to its members that they are all equally involved in some way in the decision-making of the business.
But for larger businesses with a large number of members or multifaceted operations, a manager-managed LLC may be more cost-effective as delegating tasks reduces bottlenecks and aids in better efficiency.
Member Expertise and Availability:
If members of the business have relevant experience and can spare time to run the business, a member-managed LLC fits the bill. What holds is the fact that all members can use their knowledge to the advantage of the business.
However, if members are deficient in such skills or opt for a passive role, a manager-managed LLC works best since the business stands to gain from the specialized knowledge of managers.
Investor Involvement:
Many investors who would prefer not to take a hands-on approach toward business tend to look for manager-managed LLCs purposefully. With this, they are not required to actively strategize while focusing on the returns that are being managed by professionals.
Cost Considerations:
Consider whether the LLC has the ability to pay for professional managers or whether the hiring would be an expense. As a startup, an LLC that is member-managed might be a cheaper option.
Long-Term Objectives:
Address how the managerial aspect in charge of governance is intertwined with the development and scale-up of the firm. A manager-managed LLC may be more appropriate for multi-tiered growth within the firm over time.
Final Thoughts
The choice regarding whether to pursue a member-managed or manager-managed LLC is a strategic one that shapes the day-to-day interactions, decision-making, as well as the entire structure of the business.
Factors such as the size and structure of the business, as well as the problem-solving capabilities of the members and the objectives of the company, can help you to opt for the most appropriate approach.
In whichever case, legal and business consultants should be contacted before a final decision is made to ensure that the decision is in line with the vision of the business and is legal under the jurisdiction of the state. In whichever way it may help, a proper definition of the participants in the business and their responsibilities in the operating agreement is key to the success of the LLC.
EasyFiling makes the process of setting up your business structure easy, we help you file all the required documents irrespective of whether you want a manager-managed or a member-managed business structure. From preparing a comprehensive operating agreement to ensuring that all state requirements are met, we can help you with that too.
Allow EasyFiling to help you in laying some strong foundation stones for your firm. Book a free consultation today to form your LLC.
Nabin Adhikari
