Traditionally, Limited Liability Companies are treated like partnerships. Two or more people get together, found a company, form an LLC, and then start running the business. But there’s more than one way to run an LLC. Member-Managed and Manager-Managed Limited Liability Companies are run very similarly, but there are also some key differences that anyone looking to form an LLC should know.
Member-Managed LLCs are, by far, the more common choice. Each member of the limited liability company is treated as equal to every other member, and everyone shares responsibility for the day-to-day operation of the LLC. Limited liability companies became popular because of how simple they were to run in comparison to a corporation. Small business owners wanted the liability protection of a separate business entity, without having to jump through a ton of regulatory loopholes. A Member-Managed LLC doesn’t have a separate level for management, like a board of directors, and is well-suited to small businesses with limited resources and owners that are all equally involved with running the company.
Manager-Managed LLCs, on the other hand, are a bit more complicated to run. A Manager-Managed Limited Liability Company will have a ‘board of managers,’ which is akin to a corporation’s board of directors. This board of managers is responsible for the direction and operations of the LLC, and have more control over the business than other members.
Delegating management can make sense in certain circumstances. Larger, more complex LLCs often name a board of managers simply because it would be way too difficult for all of the LLC’s members to share management responsibilities. Manager-managed LLCs are also useful when a limited liability company has members that aren’t comfortable, or aren’t interested, in helping run the company. LLCs can also hire non-members to sit on the board of managers, opening up the possibility of bringing in outside talent without giving up a chunk of the business.
How do you choose a Member-Managed LLC or a Manager-Managed LLC?
Most states actually ask those forming the LLC to disclose whether the business will be member or manager managed. So you check a box on your LLC’s organizational forms, send them in, and then get ready to run the business according to whatever choice you made.
Whichever management structure you choose, though, you must remember to formally document that choice in your operating agreement. You will need to outline and define the rights and responsibilities of the members and, if you choose to have them, managers. Running a business without an operating agreement is a quick way to cause a rift, so clarify roles early on and make sure everyone knows what is expected from them.
Have any other questions on the differences between Member-Managed and Manager-Managed LLCs? Ready to form your own Limited Liability Company? Leave a comment below, or give us a call at 1 (877) 692-6772!