Whenever there’s a limited liability company involved, you have to figure out how your LLC should be managed. There are possibly two different types of managing structures when it comes to managing LLCs. You can choose to have a manager-managed or member-managed LLC. There’s a significant difference in both management structures.
Read our member-managed vs manager-managed differences below the article to learn what they are and how they can help you manage your limited liability company.
Member Managed Vs Manager Managed – What should you know?
When you decide to set up a business, there’s no need to add the formalities you need to do for a corporation. However, you would still benefit from the rewards and protections that you would have if you opt to incorporate your business as a corporation instead of an LLC.
In addition to that, no matter what type of business you want to launch, you must understand what documents, licenses, and permits you would need for the type of business you want to incorporate.
Once you start your LLC, you have to apply for a license and permits to make sure that your LLC name is valid and available. In order to run a business either LLC or corporation, you have to have a business plan. The plan should include daily operations, marketing tactics, financing strategies and some others depending on your needs. Here are some common types of LLCs.
Single vs. Multi-Member LLCs
As the name suggests for single-member LLC, it consists of only a single owner, member, manager of the business. Here, the owner is free to choose any title for himself and manage the formalities as a business entity.
As for multi-member LLC, there will be more than one member in the business having different titles. If your business is a single-member LLC, then you have other benefits as well, such as taxation. This is because a single-member LLC is generally a disregarded entity. This actually means that single-member LLC is not obligated to pay double taxation on businesses like multi-member LLC or corporations are obliged to.
The Management structure
Once you figure out what type of business you would run – either single or multi-member LLC, you now have to decide what management structure you should go for. Whether it should be member-managed or manager-managed.
Managed by Members
An LLC must be called a Member-managed or managed by member structure when:
- An LLC business has relatively small members to manage
- All the members are willing to be involved in the business operations and daily activities both financial and operational.
How does a member-managed structure work?
When members are actively engaged in the operational activities of a business, it is referred to as member-managed LLC. In member-managed LLC, every member is allowed to deliver their opinion regarding operational and financial affairs and also are required to vote for major parts in the business matters.
This LLC structure is oftentimes known as “decentralized management”. This is because the administration and decision-making powers are distributed among the members.
For instance: A married couple Michael and Lisa decided to start a business. They registered the company as an LLC and distributed the responsibilities equally instead of hiring people from outside to run the business and manage it. So they prefer to have a member-managed LLC.
Managed by managers
An LLC must be called a manager-managed or managed by manager structure when:
- An LLC business has relatively large members to manage
- All the members are not willing to be involved in the business operations and daily activities both financial and operational.
How does a manager-managed structure work?
When members find it easier to handle daily operations by allocating administrative powers to multiple members and think of it as a more efficient way to obtain business goals, then it would be referred to as manager-managed LLC.
In this kind of organization, members do not wish and are required to put their opinions and vote in the financial or operational affairs of a business. They rather are limited to their own responsibilities. This kind of management is often known as ‘centralized management. Because it will concise the powers in the hands of one or more than one manager.
For instance, some members of a religious community decided to start a local shop where they’ll sell and purchase religious books. Movies, books, and other religious material. Many members of the local shop have been doing their full-time jobs and none are having business experience. So they hire a professional from outside the organization in return for a salary. In this situation, the manager-managed LLC would be a suitable option.
Some states also provide an option of a third-party management structure – director-managed LLC. In this type of structure, the decision-making powers are only in the hands of the board of directors. No matter if the board of directors is one person or more than one. If a director–managed LLC has one director, then he will make every decision related to the company’s needs.
If there is more than one director, a majority of votes and agreeable opinions would be required in both making decisions and in adding and removing the board of directors.
Additionally, a director doesn’t necessarily be one of the owners of the company, therefore, you would have some onboard decision-makers who are not a member of your LLC.
How to choose member-managed and manager-managed structures
In many situations, it becomes clear what structure to use – either manager-managed, member-managed, or directly managed structure for your LLC.
Sometimes there are silent partners in an LLC who do not involve in the day-to-day activities of a company. In these cases, using a manager-managed structure would be a simpler and better choice for operational decisions and business affairs.
For example; Joe and Helena are partners of a chemical manufacturing LLC. Joe is a silent partner, which means he does not take part in the day-to-day activities of the business nor puts effort into making or discussing business affairs. He is only called when his chemical expertise is needed. On the other hand, Helens manages the business, performs day-to-day tasks, and looks after the business. They both decided to choose a manager-managed LLC structure making Helena the only manager. However, both Helena and Joe are members of the LLC but Helena would be the sole manager.
Here, the thing which is not clear is why they have chosen a manager-managed structure, although both the members have economic rights instead of a member-managed structure where there are only two members in the LLC. Why they have chosen to be manager-managed instead of member-managed. The answer is simple.
The LLC structure is used depending on the purpose of the LLC. The LLC is primarily formed to secure the liability (LLC – liability limited company). And when they are manager-managed they provide protection to managers even more. Also, they provide protection to managers from creditors. As creditors only obtain access to member-economic rights instead of the company’s management rights.
Let’s continue the above example. Joe’s wife seeks divorce from Joe and requests to liquidate the assets of the chemical producing company. This may be the right of Joe’s wife but would not be fair for Helena. As they have chosen manager-managed LLC which makes Helena as manager and Joe as a member, Joe’s wife would only be able to ask for the assets named after Joe. Thus, Joe’s ex-wife has no authority to claim the manager’s rights.
So the difference of member managed vs manager managed structures, is clear from the above examples that it totally depends on the circumstances which determine the need of manager or member-managed structure for an LLC company.
Enhancements to management structures
The distinction between manager-managed and member-managed LLC can be evenly practiced when the requirements are properly drafted. This operating document can enlighten the great flexibility in the structure of management based on the owner’s or LLC’s needs.
And operating document can/may:
- Requires different levels of thresholds associated with different company events like acquisitions, mergers, or sale and purchase of company’s assets.
- Organize and create classes of members with interests and voting rights.
- Determine the board of directors to function like board members of an LLC.
- Provide a mechanism for managers and the acting board of directors to change or edit managerial functions/managers on the death or resignation of a manager.
Operating document/agreement allows management and the owners of LLC to determine the rights of the members/managers involved. And this ability segregates LLC from a corporation and any other restricted form of business.
When should you select the LLC management structure?
The best time to decide whom you should put in charge of managing your LLC is when you begin your LLC or plan to register your business as LLC. The operating agreement will be there to determine the authorities and will be beneficial to mention managers and persons with the levels of authority. Plus, having a person to make decisions in place will be beneficial for both the organization and the managing structure.
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