In most states, if you don't designate a management structure in your formation documents (your articles of organization or operating agreement) your SMLLC will be treated as member-managed by default. In addition, in many states, if you want to create a manager-managed SMLLC, you must follow specific rules.
The fundamental difference between the two LLC management structures concerns the relationship between the ownership and management of the business.
Manager-managed SMLLC: With a manager-managed SMLLC, you formally create the role of a manager for the SMLLC, which is separate from ownership. With this type of structure, you can appoint someone else or yourself as manager. While your SMLLC will still have only one owner, you can have multiple managers, if you choose.
Member-managed SMLLC: In a member-managed SMLLC, the owner is automatically also the manager.
In the context of manager-managed SMLLCs, the term "manager" refers to a specific legal role. Under typical state LLC laws, the manager has the authority to do a wide range of activities on behalf of the LLC, such as:
However, LLC laws generally limit a manager's role in a manager-managed LLC. Managers are often prevented from taking control over special or important company matters. Instead, these matters are left to the owners. Typically, a manager can't take the following actions without the owner's consent:
Sometimes, however, even these matters can be delegated to a manager. For example, a state's laws might give the owner the sole right to dissolve the SMLLC unless the SMLLC's operating agreement gives the manager authority to dissolve the company without the owner's consent. In other words, if your operating agreement says that the manager can dissolve the SMLLC without the owner's consent, and the law doesn't prohibit this delegation, then the manager has the authority to end the SMLLC on their own.
The usefulness of a separate manager role might be more obvious in the context of a multi-member LLC. Most SMLLC owners want to be actively involved in managing their companies. Therefore, there's often less need for a management structure that allows owners to delegate management authority to a non-member.
In contrast, multi-member LLCs might have members who want to be passive investors or who don't want any management responsibilities. For multi-member LLCs, a manager-management structure makes it possible to have a group of passive investors in the LLC's membership and to appoint members or non-members to run the LLC's business.
While multi-member LLCs benefit more from the manager-management option, SMLLCs also see multiple advantages, such as:
To create a manager-managed SMLLC, you should complete two steps:
As the sole owner and member of your SMLLC, you get to choose who the manager or managers will be.
In some situations, you might want to appoint another person as a manager and delegate management authority and duties to that person. For example, if your SMLLC owns rental properties, you might want to delegate to someone else the authority to collect rent, show units to prospective tenants, arrange for repairs, and handle the other day-to-day responsibilities of the business.
Delegating management authority can come in handy if you're operating a business remotely. Using our previous example, if you own rental properties in Florida but reside in New York, then it can be helpful to appoint a manager who'll be physically present to respond to tenants' concerns and meet with local contractors.
A word of caution: Be careful when appointing someone else as manager. By default, a manager of a manager-managed SMLLC has a lot of authority. So, when you appoint someone other than yourself as a manager, you should be certain that you can trust that person with your business.
The most common arrangement is for SMLLC owners to name only one manager and to appoint themselves to that role. If you name yourself as the sole manager, you don't have to do everything yourself.
You can still delegate certain management authority to others, like authorizing an employee or someone else to write checks on behalf of the business. Or, you could use a power of attorney to give someone else specific, management-like responsibilities, such as selling a parcel of the SMLLC's property.
SMLLCs offer great flexibility in their management roles. You can customize the business management to fit your company's needs as long as you're following your state's LLC laws. Just make sure you document these customized roles and corresponding duties in your SMLLC operating agreement.
In most cases, there's no problem if you, as owner and sole member of your SMLLC, are the only person with the legal authority to run your business. There are, however, two situations where being both the only owner and manager can become an issue:
While it might seem bleak or pessimistic to prepare for such situations, it's important to have a plan.
You should have some kind of written provision that appoints someone else as a successor manager to take over the manager role if you become incapacitated. Otherwise, if you're the only person with the legal right to make important decisions for your SMLLC and you haven't made any provision for a transfer of management authority, your business could be paralyzed or collapse in your absence.
The easiest way to provide for a transfer of management authority is to include a provision in your operating agreement. The provision would appoint a successor manager in the event of your incapacity or death (or whatever triggering events you choose).
You'll want to include the name of the person—or otherwise, clearly identify the person—who'll be the successor manager. For example, you could indicate that your spouse should take over as manager of your SMLLC if you die or become incapacitated.
To appoint a successor manager, your operating agreement should state:
If you have experience running or managing a business, then you can likely make the choice between a member-managed and a manager-managed SMLLC on your own. But if you have questions specific to your business and how a manager-managed SMLLC can best benefit you, you should talk to a business lawyer. They can help you weigh the advantages and disadvantages of each option. An attorney can also draft an operating agreement that incorporates your choice of management structure and includes a provision appointing a successor manager.