What Are The Difference Between Member Managed LLC vs Manager Managed LLC

A manager-managed LLC places business management in the hands of a professional manager that the members elect. In a member-managed LLC, one or more owners manage the company. In a manager-managed LLC, members appoint or hire a manager or managers to run the business. In a member-managed LLC, members (owners) are responsible for the LLC’s day-to-day operations.

By Brad Nakase, Attorney

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Table of Contents

1. Introduction

2. LLC Administration

3. Owner-Operated LLC

4. Managerial Oversight in an LLC

5. Advantages and Disadvantages

6. How to Make the Right Choice

Introduction

If you have opted for an LLC structure for your business, there is another critical choice ahead. You will have to determine the management framework for your company.

In a member-operated limited liability company, the owners jointly hold control over choices related to the business. Conversely, a manager-operated LLC delegates managerial authority to either a professional manager or members who are elected. This decision significantly impacts your company’s daily functioning, so seeking advice from an LLC attorney is encouraged.

LLC Administration

A limited liability company is an entity structure that provides owners with limited personal liability for company debts and responsibilities. It is a widely favored choice due to its simplicity in formation and reduced paperwork as opposed to a corporation.

A limited liability company may have a single owner (referred to as a single-member LLC) or it may have multiple owners. If you are the sole proprietor, you are automatically responsible for every decision concerning management, making it straightforward.

However, when a business involves multiple proprietors or investors, things become more intricate. In such scenarios, all members can jointly oversee the limited liability company, or the business can opt to appoint a manager.

The designated manager, whether elected or a member, holds the authority to make pivotal decisions for the limited liability company, such as:

Engaging in legally valid contracts and executing agreements
Purchasing and selling equipment, vehicles, real estate, and other business assets
Establishing, closing, and handling company bank accounts
Recruiting staff members and employees
Securing funding through business loans
Ensuring LLC tax compliance

Clearly, those entrusted with managing the limited liability wield significant influence. It is crucial to place this authority in capable hands. Typically, the choice between member-management and manager-management is made when the LLC’s articles of organization are filed with the state. Further specifics regarding management authority are outlined in the company’s operating agreement.

Owner-Operated LLC

In a member-operated LLC, the authority for managing the LLC rests with its owners, referred to as “members.” Every owner holds a role in making decisions. Depending on the details outlined in the operating agreement, owners may have equal influence, or it could be proportionate to their ownership stake in the company. For example, a partner with a 40% ownership might have twice the decision-making power of a partner with a 20% stake.

In this setup, each owner in a member-operated LLC acts as an agent of the limited liability company and can legally force the hand of co-owners by executing company contracts, obtaining loans, and making other determinations. However, major decisions require approval through a voting process.

This structure is fitting for businesses where you and your fellow owners desire active participation in the company’s operations. For instance, if you co-own an e-commerce venture with someone else and both desire to be hands-on in different aspects (you in website operations, and your co-owner in pricing and marketing), a member-operated LLC would be the apt choice.

Member-operated limited liability companies are more prevalent than manager-operated ones, and in the majority of states, they serve as the default structure for management. If no specific management structure is stipulated in the operating agreement for the company, it defaults to a member-operated LLC. Moreover, these LLCs generally incur lower operational costs compared to corporations, which typically have officers and a board of directors.

Managerial Oversight in an LLC

In a manager-operated LLC, the proprietors designate one or more managers to oversee daily business affairs. While members retain control over certain matters, such as dissolution of the company, the manager serves as the primary legal representative of the limited liability company and can promptly form decisions on its behalf, without the need for unanimous member approval. There may be a single manager or more than one, and the manager can be a member, although it’s not a requirement. If the manager is not a member, he or she is referred to as a professional manager. The managers fulfill a role akin to a board of directors in a corporation.

Managerial management is suitable when a limited liability company involves investors, particularly passive or “silent partners,” who have a stake in the company but lack the time or expertise for daily decision-making. In such cases, members may vote to appoint individuals with the most relevant expertise as managers. For example, in a family-owned company, parents might retain managerial authority while passing on ownership stakes to their children.

For example, imagine you and your business partner in an e-commerce venture secure investments from two individuals. As a result, all four of you become members of the business due to your ownership shares. However, all members may vote to designate you and your partner as the managers of the limited liability company. This arrangement enables you or your partner to swiftly make decisions for the business without necessitating agreement from others.

A manager-operated LLC also proves beneficial for larger companies with numerous owners. When there are in excess of 4 or 5 owners, convening frequent votes on decisions related to management becomes increasingly challenging. In such cases, it’s more efficient to assign management responsibilities, which can equate to a full-time role, to a select few members or a professional manager.

Advantages and Disadvantages

As is evident, there are significant distinctions between a member-operated LLC and a manager-operated LLC. This decision will profoundly influence your daily method of making decisions.

Advantages of a Manager-Operated LLC:

Facilitates passive investment in the company, appealing to investors.
Enhances operational efficiency, especially for larger LLCs.
Empowers active managers to make swift decisions without requiring unanimous owner consensus.
Centralizes authority in making decisions, averting potential complications from too many decision-makers.

Disadvantages of a Manager-Operated LLC:

Not all owners are involved in decisions related to management.
Necessitates meticulous documentation of the manager’s power in the operating agreement.
A professional manager may not possess the same level of familiarity with the business as the owners.
Professional managers require a salary, which may strain smaller businesses.

Advantages of a Member-Operated LLC:

All members contribute to management decisions, ensuring inclusivity.
Offers a simpler structure, especially beneficial for smaller companies.
Particularly well-suited for retail and businesses with a physical location.

Disadvantages of a Member-Operated LLC:

Managing the limited liability company can become a full-time commitment, diverting owners from strategic decision-making.
This structure can pose challenges in raising funds from investors.

How to Make the Right Choice

Ultimately, the decision between running a member-operated and manager-operated LLC hinges on the unique aspects of your company. If you have family or other investors involved, a manager-operated LLC provides a clear advantage by concentrating decision-making power in select individuals. This holds true for businesses with numerous owners.

However, for a small company with only 2 or 3 co-owners, it is simplest to allocate management responsibilities between the owners through a member-operated limited liability company. This structure affords owners greater influence over the business’s future—a quality highly sought after by most entrepreneurs.

Member management may also be a prudent choice if your company demands specialized expertise, as noted by Steven Sinatra, co-owner of World Pawn Shop with his father. “We opted for member-managed, because in our line of work, it’s challenging to find a replacement. Being a pawnbroker requires extensive knowledge. It takes our employees 2 to 3 years to fully grasp their roles. With member management, you can operate your business precisely the way you envision it. You can address issues promptly.”

Keep in mind that limited liability company members hold ownership stakes in the company. They get distributions from the company’s profits but are not classified as employees. Conversely, professional managers are regarded as employees and get a salary for their services. Similar to any other employee, you will need to deduct payroll and income taxes from a professional manager’s earnings. In cases where someone serves as a manager and a member, they can get a salary for the time devoted to managerial duties.

The good news is that LLCs offer a versatile business structure. By making adjustments to your operating agreement and gaining consensus from fellow members, you may modify your management arrangement down the line. However, it is essential to seek guidance from your lawyer prior to making any decisions that could impact the future of your business.

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