Last Updated: February 16, 2024, 1:13 pm by TRUiC Team


Member-Managed vs. Manager-Managed

When establishing a limited liability company (LLC), choosing the right management structure is a critical decision. 

There are two primary management structures for LLCs: member-managed and manager-managed. Each structure has its own characteristics and considerations. 

In this guide, we will explore these management structures in detail, helping you understand the differences, factors to consider, and their implications for your LLC.

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Diagram showing reasons to choose member-managed vs manager-managed

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.

These member-managed LLCs are sometimes called "decentralized management" because the administrative power is dispersed among the members rather than centralized in the hands of one or more managers. Usually, a member management agreement or LLC operating agreement is used for governing the organization.

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. They form a limited liability company with their own operating agreement. 

Rather than hire outside management, Michael and Melissa would prefer to remain the only members so they opt for a member-managed LLC management structure for their business structure. This is common for small businesses.

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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. Usually LLC owners are passive investors. The LLC manager handles the daily operations of the business.

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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DOWNLOAD A FREE SAMPLE OPERATING AGREEMENT

Create a free account to download our operating agreement. Please keep in mind that this operating agreement is only intended for use as a reference.

To Download: After logging into your account, scroll through the tiles on the DASHBOARD page. Select "Free Legal Forms" and click the download icon by "Free Sample Operating Agreement."

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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

Member-managed means that the members (owners) of an LLC are responsible for managing the day-to-day operations of the business.

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.

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.

Yes. An LLC can have as many managing members as desired.

Yes. In a member-managed LLC, each managing member is an owner of the LLC.

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.

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.

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