For any limited liability company (LLC), including any single-member limited liability company (SMLLC), there are two possible forms of management: member-management and manager-management. In most states, if you don’t designate a management structure in your formation documents (articles of organization or equivalent document), your SMLLC will be treated by default as member-managed. In addition, in many states, if you want to create a manager-managed SMLLC, you must follow certain specific rules.
The fundamental difference between the two LLC management structures concerns the relationship between ownership and management of the business. With a manager-managed SMLLC, you formally create a role of manager for the SMLLC which is separate from ownership. With this type of structure, you can appoint someone else or yourself as manager. In a member-managed SMLLC, the owner is automatically also the manager.
The term “manager” in this context refers to a specific legal role. Under typical state LLC laws, the manager has the authority to do a wide range of things on behalf of the LLC, such as:
However, LLC laws generally provide that LLC owners retain control over certain special or important matters. Typically, these include things like:
In a manager-managed SMLLC, the owner’s consent normally must be obtained to take the latter types of actions. Sometimes, however, even these matters can be delegated to a manager by including such authorization in an operating agreement.
To create a manager-managed SMLLC, you must specifically state that you are choosing this type of management structure in your articles of organization. It’s also important that you make this clear in your operating agreement. Then, as the sole owner and member of the SMLLC, you get to choose who the manager or managers will be. In some situations, you might want to appoint another person as manager and delegate to that person the authority to run the business. 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.
The most common arrangement is for SMLLC owners to name only one manager and to appoint themselves to that role. You could choose to 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.
A word of caution: Be careful about appointing someone else as manager. By default, a manager of a manager-managed SMLLC has a lot of authority. Therefore, when you name someone other than yourself as a manager, it should be someone you’re certain you can trust with your business.
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 this can become an issue:
To the extent you’re concerned about these possibilities, you should have some kind of written provision that appoints someone else as a successor manager to take over as manager 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 that provides for a successor manager in the event of your incapacity or death (or whatever triggering events you choose). You will want to include the name of the person or otherwise clearly identify the person who will be the successor manager. To accomplish this, your operating agreement should state:
For the specific language to use in your particular case, you may want to consult with a lawyer.
The utility of of a separate manager role may be more obvious in the context of a multi-member LLC. The owners of most SMLLCs want to be actively involved in managing their companies and, therefore, there is often less need for a management structure that allows owners to delegate management authority to a non-member. In contrast, multi-member LLCs may have members who want to be passive investors or otherwise not have any management responsibilities. For multi-member LLCs, manager-management 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.
However, as already mentioned, if your SMLLC is large or complex, manager management may allow you to appoint multiple people to help run the business. Furthermore, some legal experts believe it’s easier for someone else to take over the running of the business if an SMLLC is manager-managed. Why? Because in a manager-managed SMLLC, the manager role (separate from ownership) is already in place and the authority to delegate management to someone who is not an owner exists by law. By contrast, with a member-managed SMLLC it’s up to you to create and define a management role separate from ownership which does not otherwise exist.
For more information on member-managed as opposed to manager-managed SMLLCs, or for information about other SMLLC formation tasks, check out the related articles in the SMLLC section of this website. For fuller information on starting and running SMLLCs, pick up Nolo's Guide to Single-Member LLCs: How to Form and Run Your Single-Member Limited Liability Company by David M. Steingold (Nolo).