LLC Management Structure Guide
If you’re starting a business and forming a limited liability company (LLC), you’ve made a good choice. LLCs offer a host of benefits, including personal liability protection, pass-through taxation, and more management flexibility than corporations.
However, although you’re free to manage your business any way that you choose, you do have to decide between two types of management structures for your LLC – member-managed or manager-managed.
In this guide, we’ll define both structures and offer guidance on choosing the structure that’s right for your LLC.
LLC Managers Defined
First, let’s clarify what an LLC manager is. LLC managers have certain powers to act on behalf of the LLC, such as signing contracts, obtaining financing for the business, hiring and firing employees, and making strategic decisions. They can also manage business bank accounts and handle other financial matters.
You can hire internal managers, like a sales manager or an IT manager, but those managers do not have the same powers as an LLC manager.
Clearly, this means that determining who the LLC managers are is a critical decision.
LLC owners are called members of the LLC. In a member-managed LLC, all members have LLC management powers and are involved on a day-to-day basis in managing the LLC. The key word is ALL – there are no silent partners in the business who do not have LLC management powers.
Member-managed LLCs are most common, particularly for small businesses that have only one or a few members.
A manager-managed LLC occurs in three scenarios.
In scenario one, some members are appointed as managers while others have a financial interest in the company but no management powers. This often occurs when a member is simply an investor but has no involvement in the management of the LLC.
Those members may still have voting powers when it comes to important decisions, but they don’t have the authority to enter into contracts or act in other ways on behalf of the LLC.
Such a scenario may also occur if the LLC has a large number of members, which makes it impractical for all of them to be LLC managers. In this case, It's important to consider factors such as the size of your LLC, your members' skills and interests, and even financial factors, like how much does an LLC cost per year. When you determine the right management approach for your LLC, it's crucial to factor in this cost into your decision-making process.
The second scenario is when all members are LLC managers, but a non-member or members are also appointed as LLC managers. This may occur when an advisor or other professional is involved in managing the LLC but does not own any part of the LLC. This scenario is less common.
The third scenario occurs when no members are LLC managers and non-members are appointed as managers. This may occur if the members are simply making a financial investment in starting a business, but will not have an active role in the business. It also may occur if the members simply do not have management skills and determine that it’s in the best interests of the business to appoint professional non-member managers.
Making the Choice
The best management structure for your business depends on many factors specific to your business. How many members your LLC has, the ownership structure of your LLC, and the management skills of members are all considerations.
It’s most likely that either a member-managed structure will be best or that you’ll have a manager-managed structure in which certain members will be appointed as managers while others are silent partners.
Often, it can be a good idea to speak with an attorney before making a choice.
How to Document Your Management Structure
First of all, in some states, you may have to specify your management structure on your LLC formation documents and include the names and addresses of members or managers.
But the most important place to document your management structure is in an operating agreement. An operating agreement is not required in most states, but without it, the specifics of the ownership and management of your LLC are not documented and are therefore undefined.
The operating agreement should define the ownership percentages of members, how profits are distributed, and how ownership can be transferred.
It also will define the voting rights of members, who will manage the LLC, and the specific powers that managers have. It should also define the specific roles and responsibilities of members and managers.
It cannot be stressed enough how critical this document is, particularly when your LLC has multiple members. Without an operating agreement, disputes may end up in court, and because aspects of the LLC’s ownership and management are undefined, the courts may not be able to settle disputes and thus order that the LLC be dissolved.
An operating agreement should be drafted with the help of an attorney. It’s well worth the cost to protect the interests of members and of the business itself.
Now that you understand LLC management structures, it’s likely that your decision won’t be complicated, but if you have concerns, be sure to speak with an attorney. They can help you to weigh the pros and cons of each scenario and advise you of your options.
They also should be involved in creating your operating agreement. An attorney’s help can give your business the best chance of a successful future.