Member-managed versus manager-managed LLCs – how to find the right fit
Wondering which LLC management structure suits your business needs? Here’s what you need to know about member-managed versus manager-managed LLCs to make a choice.
Want to start an LLC and are struggling to choose between a member-managed or manager-managed LLC structure? While both offer distinct advantages, understanding their differences is important for making an informed decision.
That’s why, in this post, we’ll explore the ins and outs of member-managed and manager-managed LLCs. This way, you can determine the right fit for your business.
Before we go into the specifics, we’ll briefly review what an LLC is. We’ll also talk about why it’s a popular choice for small businesses. Let’s get started.
What is an LLC?
A Limited Liability Company (LLC) is a business structure that combines the limited liability protection of a corporation with the flexibility and tax benefits of a partnership or sole proprietorship.
This hybrid structure shields your assets, as an owner or member, from the business’s liabilities. Plus, it offers pass-through taxation, where profits and losses are reported on your tax returns.
An LLC also allows you to choose between two management structures – member-managed and manager-managed.
The good thing is that there are online formation services that simplify the process of forming an LLC. Business formulation agencies like GovDocFiling simplify the business formulation process and make it an easier task for you.
How a member-managed LLC works
In a member-managed LLC, all members are active decision-makers and play a role in the management of the business. They can also hire employees and sign contracts for the company.
This structure works great for small businesses with a limited number of members directly involved in the day-to-day operations.
The pros of a member-managed LLC
Here are some of the benefits of a member-managed LLC.
Direct involvement
All members have the authority to make decisions on behalf of the LLC. This includes financial management, hiring, and strategic planning.
In addition, this direct involvement and control fosters a sense of ownership and accountability among the members. Plus, it enables quicker responses to customer needs and market changes.
Flexibility
Member-managed LLCs come with flexibility and agility in decision-making. Since all members have equal voting rights, decisions are made quickly without lengthy approval processes.
Cost-efficiency
Since there are no separate management layers, member-managed LLCs are often cost-effective to operate. You don’t need to hire external managers, which can save administrative expenses.
Alignment of interests
Since every member is actively engaged in the business, there’s a better alignment of interests and shared vision between stakeholders. This can lead to smoother decision-making processes and enhanced overall performance.
The cons of a member-managed LLC
While member-managed LLCs offer many benefits, they also come with their challenges. This includes:
- Rise in conflicts of interest or disagreement over strategic direction as more members get involved.
- Distraction from focusing on strategic decisions as managing this LLC structure can be a full-time job.
- Delay in decision-making if members lack expertise in some areas. This requires additional training or hiring external consultants.
How a manager-managed LLC works
In a manager-managed LLC, one or more appointed managers are delegated the management authority. Also, they may or may not be members of the LLC.
This works similarly to a traditional corporation — a board of directors makes decisions performed by the executives.
This structure is suitable if you have multiple members and not every member wants to be involved in the day-to-day operations.
The pros of a manager-managed LLC
Here are some of the benefits of this LLC structure.
Clear hierarchical structure
With manager-managed LLCs, you have a clear hierarchical structure. Here, designated managers are responsible for making operational and strategic decisions.
This centralized management can streamline decision-making processes. Plus, it provides clarity on roles and responsibilities.
Specialized expertise
Appointing managers with specialized experience and skills allows your business to benefit from professional expertise. Even better, members are not required to be actively involved in management to get this benefit.
This enhances operational efficiency and strategic planning. This is especially advantageous if your business operates in a complex or highly regulated industry.
More focus on investment
Manager-managed LLC allows you to focus more on your investment in the business without having to dedicate time to day-to-day operations.
This passive involvement allows you to pursue other ventures or interests, while still benefiting from the LLC’s profitability.
Potential for conflict resolution
This LLC structure may experience fewer conflicts among members regarding operational decisions since there’s a clear line of authority.
Since managers are entrusted with making decisions in the best interests of the LLC, this can reduce the likelihood of disagreements.
Supports scalability
With appointed managers overseeing operations, your business is better equipped to scale and grow. And, you can do this without burdening members with additional responsibilities.
Attracts investors
Manager-managed LLCs are attractive to passive investors who prefer having limited involvement in the business’s operations. They can do so and still enjoy the benefits of ownership.
The cons of a manager-managed LLC
Manager-managed LLCs also come with their drawbacks. These include:
- Members relinquish direct control over day-to-day activities to appointed members, which may lead to concerns about accountability.
- Hiring professional managers incurs additional expenses. Like benefits, bonuses, and salaries. This can impact your business’s profitability, especially in the early stages.
How to choose the right structure for your business
Selecting between a member-managed and manager-managed LLC requires careful consideration of various factors. These include:
- The number of members involved in the business, and how many want direct involvement in management decisions.
- Whether or not members possess the necessary skills and resources to manage the business effectively.
- The presence of passive investors or external stakeholders whose preferences and expectations need to be considered in the management structure.
- Your business’s growth prospects, and how each management structure aligns with your long-term vision and scalability goals.
What kind of LLC do you need?
The choice between member-managed and manager-managed structures impacts how your business operates. It also affects your business’s external dynamics and its ability to adapt and thrive in a competitive market landscape.
While member-managed LLCs offer direct control and flexibility, manager-managed LLCs provide professional management.
However, your decision should reflect your business’s unique needs and priorities. Plus, you should balance considerations of costs, expertise, control, and long-term aspirations.
Author: Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
