Member-Managed vs. Manager-Managed
In the process of forming a limited liability company (LLC), one of the most important decisions you'll have to make involves how the business will be managed.
LLCs have two basic management structures: member-managed and manager-managed.
Read our Member-Managed vs Manager-Managed guide below to learn more about how to choose a management structure for your small business.
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.
Member-Managed vs. Manager-Managed: FAQ
What does member-managed LLC mean?
Member-managed means that the members (owners) of an LLC are responsible for managing the day-to-day operations of the business.
What does manager-managed LLC mean?
Manager-managed means that the members (owners) of an LLC hire someone to be responsible for managing the day-to-day operations of the business.
Should a single-member LLC be member-managed or manager-managed?
The best management structure for your LLC depends on a number of factors as outlined in the above article. It will depend on your own unique circumstances.
For some LLCs, a member-managed structure will work best while a manager-managed structure may be a better option for others. Many single-member LLC owners also find it helpful to hire a manager to take over some management responsibilities.
Can an LLC have two managing members?
Yes. An LLC can have as many managing members as desired.
Is a managing member an owner?
Yes. In a member-managed LLC, each managing member is an owner of the LLC.
Are managers of an LLC liable?
The laws governing LLCs can differ by state, but managers of LLCs generally aren’t personally liable to third parties related to their actions as manager of the LLC as long as they didn’t act unlawfully.
Managers can, however, be liable to the LLC and its members if they violate the terms of their contract.
Do LLC managers have fiduciary duties?
LLC managers generally have fiduciary duties to the LLC and its members. This means they must act in good faith and put the good of the LLC above their own personal interests when making decisions about the LLC’s operations.
