When I help clients set up their business, one of the most significant decisions they will make is which type of entity to form. If they have settled on starting a limited liability company (LLC), they must also choose the type of management structure it will have. As an Austin Estate and Business Planning Attorney, I walk clients through the advantages and disadvantages.
Members can structure an LLC as either member-managed or manager-managed. While most members structure LLCs as member-managed—the default form of management under many state LLC laws—you should consider the alternative. Being an LLC manager means having the legal authority to bind the company to contracts and agreements and participate in day-to-day management. Regardless of your chosen structure, you should clearly spell out the management details in the company's operating agreement.
Before delving into the differences between member-managed and manager-managed LLCs, let's outline what LLC managers do.
The manager of an LLC is an agent of the company. As an agent, the manager typically has the legal authority to take the following actions:
The ability to bind the LLC by their actions gives managers significant power. Managers, however, have a fiduciary duty (i.e., a legal duty) to place the LLC's and its members' interests above their interests.
Member-management is the most common form of LLC management structure. Every owner of an LLC is also a member. A member can own a 100 percent interest in a single-member LLC or any other percentage in a multimember LLC. There is no limit to the number of members an LLC can have.
In a member-managed LLC, the members run the company. Members have the right to bind the LLC (and its co-owners), with business decisions typically based on a majority vote of the members (e.g., signing a contract, obtaining a business loan, and other legal arrangements). Voting rights may be proportional to ownership, but you can specify different LLC operating agreement structures. The members could choose, for example, to alter equal voting and decision-making rights to streamline operations while maintaining a member-managed structure.
A member-managed structure makes sense for a small business with limited resources whose members want to be actively involved in its management. Such business owners might like to work as part of a team, engage directly with their employees and customers, and make and sell products. Again, member-management is the default rule under most states' LLC laws. If you do not alter this arrangement in the operating agreement or articles of organization, the LLC will likely be considered member-managed.
Please note, however, that in some instances, the single-member-managed LLC may have weaker liability protection because it is more challenging to maintain the separation between the owner and the business. In particular, member-managed single-member LLCs are more vulnerable to attempts to pierce the veil. However, if the LLC member and the manager are different people, the member is afforded an extra layer of protection.
As an LLC grows in complexity and sophistication, or if it has many members, it might be less practical to have the members equally share responsibility for running the company. This can be true if the company takes on "silent partner" owners who simply want to invest in the business or if it has a large number of members, making shared management untenable. In these situations, delegating management duties to a manager or group of managers could be a better choice of LLC management structure.
Manager-managed LLCs can be run either by one or some of the LLC members or by an external manager or managers. It could be a business entity, such as a corporation, a trust, or even another LLC (though some states restrict which types of entities can be LLC managers). Or, it could be a combination of the two (some internal managers and some external managers). The manager does not have to be a natural person.
Management requires a distinct skill set that not all members may possess. The business may run more efficiently and professionally with designated, competent managers. But choosing a manager-management structure is not to be taken lightly because members give up considerable authority once instituted. They will no longer have a say in day-to-day business decisions and may not bind the LLC as an agent.
Even when managers run the LLC, members typically retain some voting rights. They can still vote to amend the operating agreement, elect and remove managers, admit new members, call for a merger or dissolution, and make other essential business decisions.
In some states, you determine the management structure of your LLC when you file the articles of organization with the state. Articles of organization are the founding documents of a company that lay out its basic structure.
If the members want to change the management structure from member-managed to manager-managed after filing the articles, they will have to vote to authorize the change. The state may require a unanimous vote for this change to take effect. The members should also update the operating agreement to reflect the new management structure.
Thorough documentation of your LLC is essential to ensure the asset protection that LLCs generally afford their owners. The LLC members should also create other LLC documents, such as certificates of membership, a schedule of assets, and a statement of authority. Keep in mind that, beyond the fundamental dichotomy of member-managed and manager-managed LLCs, there is much room for nuance within the operating agreement.
Do not rely on generic online templates to set up your LLC. Make sure your documents reflect the specific needs of your business and fully protect you and your business partners. For professional help structuring and documenting your LLC, contact our legal team and set up an appointment.
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