LLC Basic Structure
An LLC is a registered business entity that combines the limited liability protection of a corporation with the pass-through taxation structure of a sole proprietorship or partnership. The owners of an LLC are called members. All LLCs must have at least one member, but there is no upper limit on the number of members a business can have.
LLCs offer a great deal of flexibility. They do not come with the more formal requirements of corporations such as passing bylaws and holding regular shareholder meetings, and they allow business owners to choose exactly how they’d like to be taxed. While pass-through taxation is the default and most common method, an LLC may also elect to be taxed as a corporation.
This flexibility extends to the management structure of an LLC. Business owners have the option to be member-managed or manager-managed. This means that LLC members can take a full and active role in regular business operations or they may choose to designate a manager or managers to handle day to day responsibilities. Regardless of which option they choose, an LLC’s management structure must be clearly detailed in the company’s operating agreement.
Member vs. Manager
Member: An LLC member is an owner of that LLC. Typically, each member of an LLC has made a capital contribution of some kind to secure a stake in the business. That contribution may be start-up funds, services, or physical assets like office space or equipment. All LLC members have an interest in the business no matter their role. This affords them the right to a portion of business profits, voting rights, and a number of other rights as outlined in the company’s operating agreement.
Manager: An LLC manager is an individual, group, or entity chosen by LLC members to manage the day to day operation of the company. Managers may be one or more current members or a third party. Third party managers can be people or other business entities such as corporations or other LLCs.
Member-Management: The Default Management System
Member-management is the default structure for an LLC that does not specifically designate itself otherwise. In a member-managed LLC, all members play an active role in the day to day operations of the business. This designation is common since many LLCs are small businesses with only a few members and limited resources for hiring outside management.
When Does Selecting Manager-Management Make Sense?
Although member-managed is the most common structure for both single-member and multi-member LLCs, there are a few scenarios in which hiring a manager makes sense.
- Passive investors. If you received investments from individuals who want to support your business but are not interested in being active participants, you can designate one or more of your other members to serve as manager of the company, allowing your passive investors to stay behind the scenes.
- Large membership. There is no limitation on the number of members an LLC may have. This is beneficial in many ways, but it can also make management a challenge. If your LLC has so many members that decision making has becomes too complex or divisive, it may make sense to designate a smaller subset of your members as managers.
- Skill level. Not all LLC owners are born managers. It’s possible that some or all of your LLC members will be ill-equipped to handle a management role. In this case, the business will benefit from designating or hiring a manager with the skills and experience necessary to effectively operate the company.
- Growth. Even if you started your LLC as member-managed, as your business grows you may opt to designate or hire a manager to take over the day to day operations. You can alter your status at any time.
- Multiple locations. If you run a business with more than one location, such as a restaurant or retail store, hiring managers are often appropriate. Since you cannot be in more than one place at once, having managers for each of your locations will help you hire and manage employees, handle inventory, and take care of the daily operations of each location.
LLC owners do not lose any of their rights as members by opting for a manager-managed company. Choosing this designation can, however, free up valuable time and resources needed to handle the most important company decisions and responsibilities.
Responsibilities of a One-Person LLC
Single-member LLCs are given the same options as multi-member LLCs when it comes to selecting their management structure. While many single-member LLCs will opt to be member-managed, handing all the day to day responsibilities of the business on their own, others may benefit from bringing on a third-party manager.
As the owner of a single-member LLC all of the responsibilities of the business fall to you. This means you will be faced not only with running the daily operations of your company but also handling all the behind the scenes work required to keep your LLC going. This includes:
- Drafting and maintaining formation documents
- Drafting an operating agreement to govern your business operations
- Filing annual reports with your state of formation
- Keeping all personal and business finances separated
- Obtaining and renewing all relevant licenses
- Negotiating and signing contracts
- Dealing with lenders and other financial institutions
- Keeping complete and accurate records of all business transactions
This can be a lot for one person to handle alone, especially when also faced with keeping the business of the LLC running smoothly each day. For this reason, it can be extremely beneficial for some single-member LLCs to bring on a third-party manager to shoulder some of the load.