Choosing an LLC as your new business’s structure is a solid move.  LLCs are relatively easy to create and they provide asset protection and limited personal liability for their owners.  One of the important decisions you must make when forming your LLC is how the company will be managed.  LLCs can either be managed by their members (owners) or by managers (sometimes the owners, but sometimes employees of the LLC).  Which one is right for your LLC?  Here are some considerations to think about when choosing your LLC’s management structure.

Management of the LLC

An LLC might have one owner (a single-member LLC) or multiple owners.  With single-member LLCs, by default the owner is in charge of all management decisions, so a member-managed structure is usually the best option.  But when there are more member-owners involved, things get more complicated.  Either all members can collectively manage the LLC or a manager can be chosen to run the LLC.

No matter who manages the LLC, they will have authority to act on the LLC’s behalf in the following ways:

• Enter into legally binding contracts
• Buy and sell assets, such as real estate, equipment, and other business property
• Open, close and manage business bank accounts
• Hire and fire employees
• Take out loans for the company

Given the broad reach of the manager’s decision-making authority, it’s critical that you choose your manager(s) wisely.  So will it be a member-managed or manager-managed LLC for you?

Member-managed LLCs

In a member-managed LLC, the authority is vested in the owners of the LLC, also known as members.  Each owner/member has decision-making power, but this authority can be further delineated in the LLC’s operating agreement.  This document acts like the by-laws of a corporation and spells out the rules and procedures related to the administration of the LLC.  The members can draft the operating agreement to say virtually anything, including how the division of power should be apportioned among the members.

Note that regardless of how the authority is allocated, all members will have a vote when important company decisions need to be approved.  Such decisions might include whether to execute contracts, borrow money, hire key employees, or make capital purchases.  So the member-managed option makes sense when joint owners want to be actively involved in the company’s operations.

Manager-managed LLCs

In a manager-managed LLC, the owner-members choose a manager or managers to handle day-to-day business decisions.  The members retain authority to make heavier decisions, like selling or dissolving the company, but the manager is given the power to make every-day decisions without member approval.  The elected manager may be a member, but often they are “professional managers” who have been hired from outside the company for their expertise in running businesses.

The manager-managed structure is especially appropriate when the LLC has investors, who likely don’t have time to make daily decisions.  While these investors may own a portion of the business, they can choose more knowledgeable candidates, either within or outside the company, to act as managers.  This structure also works well for family-owned businesses, where parents retain management authority while their children are entrusted with some ownership of the business.  It also works well in large LLCs with many owners, where it may be difficult to arrange meetings to vote on management decisions.  Delegating that responsibility to a designated manager solves that problem.

This structure also makes sense in single-member LLCs where the sole owner may not have adequate management experience.  And when a trust acts as a member of the LLC, especially in single-member scenarios, the manager-managed option allows the trustee or a professional manager to run the business on behalf of the trust.

Pros and cons

There are important differences between a member-managed LLC and a manager-managed LLC, and the choice of structure will have an impact on how the day-to-day operations of the LLC are managed.  For quick comparison, here is a list of pros and cons of each structure.

Pros of member-managed LLC

• Less complicated structure, particularly for small companies
• All members have a say in management decisions
• Most common choice for single-member LLCs

Cons of member-managed LLC

• Management of the LLC can be a full-time job, taking owners’ time away from strategic decisions
• All of the members have to work together in running the business
• Difficulty in raising money from investors, as they might not want to be involved in managing the business

Pros of manager-managed LLC

• Easy for investors to passively invest in the business
• Easier for large LLCs to operate quickly
• Allows managers with active control to make quick decisions without having to get the consensus of all owners

Cons of manager-managed LLC

• All owners don’t get to participate in management decisions
• Need to carefully document the manager’s authority in the operating agreement
• A professional manager might not understand the business as well as the owners
• A professional manager needs to earn a salary, which can be hard on smaller businesses

The choice between a member-managed and a manager-managed LLC depends on the specifics of your business.  If you need assistance deciding which option is best for you, and to ensure all the best practices for forming your LLC are followed, TrustBridge Legal would be happy to help you.