Management By Members

An LLC Should Have a Member-Managed Structure When:

  • The number of LLC members is relatively small
  • The members are able — and willing — to be involved in the day-to-day operations of the business

What Does a Member-Managed Structure Look Like?

In a member-managed LLC, the members are actively engaged in the operations of the company. Each member has a say in both daily operations and big-picture affairs, and a vote is required for all major business decisions.

This LLC structure is sometimes called "decentralized management" because the administrative power is dispersed among the members rather than centralized in the hands of one or more managers.

Consider the following example:

Married couple Michael and Melissa Thompson decide to start a bed-and-breakfast together. They wish to register the business as an LLC and share equal responsibility in running the company. Rather than hire outside management, Michael and Melissa would prefer to remain the only members so they opt for a member-managed LLC structure.


Management By Managers

An LLC Should Have a Manager-Managed Structure When:

  • The number of LLC members is relatively large
  • The members don’t wish to be involved in the day-to-day operations of the business

What Does a Manager-Managed Structure Look Like?

In a manager-managed LLC, the members recognize that allocating administrative power to one or more specific managers is a more efficient way to handle the day-to-day affairs of their company. Manager-managed LLCs don’t require members to vote on all business decisions, but instead grant the manager(s) authority to call the shots.

This LLC structure is sometimes called "centralized management" because it consolidates administrative power in the hands of one or more managers.

Consider the following example:

Forty members of a religious community decide to open a local shop in which they'll sell religious books, clothing, movies, and other materials. Most of the members have full-time jobs and none have experience running a business. For these reasons, they choose to appoint another member of the congregation to manage the business in exchange for an annual salary. In this case, a manager-managed LLC structure is the most suitable option.


Conclusion

Choosing a management structure for your LLC is an incredibly important task so take your time and consider the options carefully.

Before setting anything in ink, you and your fellow members should know the answers to these three questions:

  • How many members does the business have?
  • What level of involvement are the members able to have in the day-to-day operations of the business?
  • What rights and obligations do the members want regarding the company’s big-picture affairs?
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Many states have default rules that will automatically determine aspects of an LLC's management structure unless otherwise defined in the business's Articles of Organization or operating agreement. If you have specific concerns regarding the default rules of your state, consider hiring a local attorney to assist in the formation of your LLC.