Member-Managed vs. Manager-Managed LLC

One of the benefits of an LLC is the flexibility of choosing your management structure. For example, your LLC can be member-managed, meaning that the LLC owners, called members, handle all the management duties. Or you can choose a manager-managed structure, which hires employees to manage the LLC. 

This guide provides all the information you need about being a member-managed or manager-managed LLC to choose the best option for your business.  

What LLC Managers Do

LLC managers, whether they are members or not, assume various roles and handle different duties. For example, you can have a Chief Executive Officer (CEO), a Chief Financial Officer (CFO), and a Chief Marketing Officer (CMO). 

LLC managers, however, have specific overriding responsibilities to the company, whether they are members or not. They make critical decisions and develop strategies to move the business forward. They can also do the following on behalf of the LLC:

• Sign legal documents
• Enter into contracts
• Hire employees
• Manage bank accounts
• Get financing for the company

Because these management decisions and duties are critical to the business, choosing your management structure and managers is of the utmost importance.

Member-Managed LLCs

In a member-managed LLC, all members are involved in the day-to-day operations and management. Most LLCs are small businesses that cannot afford a management team and are thus member-managed. 

Many LLC owners prefer the member-managed structure because it keeps them in control of all decision-making. Unlike a corporation, where managers must answer to a board of directors, member managers answer to no one. They have the authority over everything done for and within the business.

In some states, you have to specify whether your LLC will be member-managed or manager-managed in the articles of organization filed to form the LLC. But in most states, LLCs are considered member-managed by default. 

Pros and Cons

Manager-Managed LLCs

In a manager-managed LLC, some members can still be managers alongside non-member managers. In such cases, the members who are not managers are passive investors in the company. They do not play a role in day-to-day operations. 

Generally, a manager-managed structure is chosen when some members are passive investors or the LLC has too many members to share all the management duties. 

Sometimes, however, members need to gain management skills to run the company, so hiring professional managers makes better sense for the business. 

Pros and Cons

The Operating Agreement

Most states do not require an operating agreement, but having one is essential. The operating agreement will define your management structure, the ownership percentages of members, and how profits and losses are distributed. 

Those are the key elements of the operating agreement, but it should also include the following:

• Each member’s rights and responsibilities
• Voting rights of each member
• Rules for meetings and voting
• What happens when a member sells their interest, becomes disabled, or dies

You can find operating agreement templates online, but it’s best to have them drawn up or reviewed by an attorney. The language of an operating agreement is crucial and can often help determine how member disputes will be resolved. 

Which Management Structure Is Right for Your Business?

The beauty of an LLC is that you have a choice! 

If your LLC has members who want to be passive investors and reap the financial benefits of ownership, you should go with a manager-managed structure. However, remember that some members can still be managers under this structure.

If all members want to be involved and maintain control, then a member-manager structure is the better choice. One key consideration is that if you hire non-member managers, you’ll have to pay them a salary, which can be a hefty chunk of your operating budget. 

In Closing

The role of LLC managers is critical, so your management structure decision is of the utmost importance. Take the time to weigh your options and decide which is best for your business. 

It’s always a good idea to carefully outline your management structure with clearly defined roles and responsibilities in your operating agreement. And you should probably have an attorney draft or review your operating agreement to ensure nothing is missed.