Once you choose an LLC as your business entity structure you need to decide on the management structure of your LLC. You can choose member managed vs. manager managed. In this article, we will go over what these types of management structures mean and how they work for you.
LLC Management
An LLC limits the owner(s) liability when it comes to business debts and obligations. Whoever oversees management can make business decisions for the LLC. This includes the following:
- Entering binding contracts and signing agreements.
- The ability to buy and sell real estate, equipment, vehicles, and other business assets.
- Being able to open, close, and manage bank accounts.
- Hiring employees.
- Borrowing money through business loans.
Management holds a lot of power, so it is important you place this power into the proper hands.
Member Managed LLC
A member managed LLC places the power into the hands of the owners, also known as the members. If there are multiple owners, they each have a voice in decision making. This is proportional to the percentage of their ownership interest. If there are multiple owners, they must vote to approve decisions. This is the default management structure of an LLC.
Manager Managed LLC
With a manager managed LLC the members elected a manager(s) to handle the day-to-day affairs of the business. While members retain certain authority, like dissolving the LLC, the manager is the main legal agent. This management structure is useful when you have a large company with a lot of members. Having a manager prevents frequent voting over the day-to-day decisions of the business. The powers of the manager are outlined in the LLC operating agreement.
Pros and Cons
As with every financial decision, there are both pros and cons to any decision you make. We will review what some of these are.
- Pros of a Member Managed LLC
- All members are given the chance to have a say in business management decisions.
- The structure is less complex.
- Cons of a Member Managed LLC
- Structure can make it difficult to raise money from investors.
- If there are a lot of members, the need to vote can make decision making burdensome and complex.
- Pros of a Manager Managed LLC
- Makes it easy for investors to passively invest in the business.
- Allows the day-to-day operations of the LLC to operate more easily.
- Allows managers to be able to make decisions quickly without the hassle of needing to get a vote from all the owners.
- Centralized decision making, especially for LLCs with many members.
- Cons of a Manager Managed LLC
- It does not give owners a chance to participate in management decisions.
- A manager’s authority needs to be carefully documented in an operating agreement.
- Typically, managers take a salary, which could be a burden on a new or small business.
Choosing Member Managed vs. Manager Managed
Whether you choose member managed vs. manager managed will depend on the specifics of your business. You will want to ask yourself questions like how many total members will the LLC have? Do I want to have silent investors? Do the members want to be involved in the handling of day-to-day matters? The answers to these questions will help you determine what type of structure is best for you.
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