When forming your LLC, your lawyer may ask you whether you want the entity managed by members or managers. To which you’re likely to reply, “What’s the difference?”
A member-managed LLC is the simplest arrangement, which makes it attractive for people attracted to the LLC structure for its relative simplicity (at least when compared to a corporation). In a member-managed LLC, the members – that is, the owners of the LLC – run the business. If your operating agreement requires majority consent for major decisions, then members owning more than 50% of the company can make these decisions without the consent of the remaining members. In this way, members of an LLC are similar to shareholders in a corporation, and make decisions in a similar way.
Manager-managed LLCs, by contrast, are managed by a group of managers similar to the board of a corporation. The managers can also be members of the LLC, although they typically don’t need to be. Managers are usually elected by the members of the LLC, and are given the authority to manage the LLC on behalf of the members.
So, which structure is best for your business? It depends on the complexity of your entity and how you want to structure the process by which decisions are made.
For example, for single-member LLCs – which are often formed by sole proprietors who simply want additional liability protection – member management typically makes sense, since there is rarely any point to the sole member also serving as a manager in the company. The same is true of multi-member LLCs where the members intend to run the business themselves. While these members could name themselves as managers, in most situations this serves only to create unnecessary confusion and complexity.
Manager-managed LLCs are ideal for companies that have passive investors. For these companies, the investor can be a member and own a percentage of the company’s equity, but leave the management of the company to the managers.
Because each company is different, and because the needs of the company may change in the future, it’s important to plan out the best structure for your business with an experienced attorney in your state. They can help you craft an operating agreement that makes sense for your entity, while giving you as much flexibility as possible to change the structure in the future if need be.