When you form a limited liability company (LLC), you'll need to decide how your LLC will be managed. With LLCs, there are two different possible management structures:
Before you register your LLC with your state, you should decide which management structure your LLC will have. Your decision will determine how your LLC is run and each individual owner's rights and responsibilities.
One of the major benefits of an LLC is that it provides the owners with flexibility and options for the management of the business. Generally speaking, management refers to the day-to-day operations of an LLC. However, the company's operating agreement can specify what duties are placed on management, which can include:
Overall, the managers of an LLC are agents for the business, meaning they have the legal authority to act on behalf of the LLC. As a result, you should give careful consideration to who you select for management.
Most people who set up an LLC choose member management where all the members share responsibility for the day-to-day running of the business. This approach is more common in part because most LLCs are small businesses with limited resources that don't need a separate management level to operate.
In a member-managed LLC, all members are considered managers.
Unlike corporations, LLCs have a streamlined organizational structure, without officers or boards of directors. As a result, the LLC form is often chosen by people who want to be directly involved in managing and operating their business.
If you and the other members of your LLC want to run your own business—actually make and sell products, take orders, and provide services—then you'll want a member-management structure for your LLC. For example, if your LLC is a bakery and all of your LLC members want to play an active role in the business—crafting recipes, baking goods, hiring employees, and opening and closing the shop—then you'll want to operate the LLC as member-managers.
In most states, LLCs are member-managed by default under state law. So, if you don't designate a management structure for your LLC either in your formation documents or operating agreement, then it'll be considered a member-managed organization.
There are two major advantages to forming a member-managed LLC:
However, there are also downsides:
In some situations, a manager-management structure might be preferable. The most common example is when some members only want to be passive investors in the business. These owners often feel more comfortable if the LLC delegates management responsibilities to one or more other members (or nonmembers).
In a manager-managed LLC, all members aren't considered managers and all managers aren't necessarily members. The members are the owners of the LLC. The managers are whoever the owners have appointed to manage the LLC.
Situations where LLC owners could prefer a manager-management structure are:
Delegating management to a smaller group of people or just one person can be an effective way of balancing the varied skills and interests of multiple LLC members. This delegation can also ensure more competent management of the business.
While LLCs that appoint managers often rely on one or more of their own members to fill the role, you can hire a nonmember as manager.
The major benefits of manager-managed LLCs include:
On the other hand, some of the downsides of manager management include:
If you choose member management, you might not be required to formally document this choice anywhere. However, many states ask you to state whether your LLC will be member-managed or manager-managed in the articles of organization that you file to form your LLC.
Nevertheless, all LLCs should have a written operating agreement that defines the basic rights and responsibilities of the members (and managers, if you have them).
In a member-managed LLC, your operating agreement would include provisions such as:
Without an operating agreement, you run the risk of finding yourselves in a full-blown crisis when something unexpected arises because basic issues weren't clearly addressed and agreed to early on.
If you fail to create your own operating agreement, then your state's LLC rules will apply. These aren't necessarily the rules that you want for your business so make sure you have your own written agreement for your LLC.
If you choose manager management for your LLC, your state's laws will likely require that you clearly spell out this choice somewhere in your LLC's organizational documents. Typically these documents are either:
In addition to the provisions mentioned above for a member-managed LLC operating agreement, your agreement should address what authority and responsibilities the manager, or managers, will have. For example, will the managers have sole authority for all hiring decisions? Can one manager make large equipment purchases without the approval of the other managers?
Just like with the member provisions, documenting the extent of the manager's—or managers'— authority can help avoid problems down the road.
Deciding how your LLC will be run and managed is a big decision to make up front. If you and your co-owners have worked together before or you have experience managing a business, you can probably make this decision on your own.
But if you and your co-owners have different business interests or you need legal guidance on dividing management roles and responsibilities, you should talk to a business lawyer. An attorney can help you draft an operating agreement and advise you on the best legal organization for your business.