LLCs – Manager or Member-Managed?

When you are designing your LLC, chances are you’ll be asked this question, either in the Articles of Organization, or you’ll be asked, by your attorney or incorporator. How you answer depends on your long-term plans for the LLC.

First up, a little background on what it means to be a Member-Managed LLC and a Manager-Managed LLC.

A Member-Managed LLC is one where every single owner participates in everything. Any one of you can sign company checks. Any one of you can make decisions and sign contracts on behalf of the LLC. You are all equal in terms of power within the company. In a sense, it’s like a single level combined management/ownership model.

A Manager-Managed LLC, by contrast, is a split-level structure. Power to run the business is given to those individuals (or companies) who are named as Managers. In this model, the Members (owners) take on a more passive role, like traditional shareholders. A Manager doesn’t have to be a Member of the LLC, in order to operate it, although in practical fact, they usually will be. And, not all Members have to be Managers, but they can be. There is no limit on the numbers of Managers or Members in an LLC, unless you specifically set limits in the Operating Agreement.

So which is better? Personally, I will always take a Manager-Managed LLC over a Member-Managed LLC.

I look at it this way: what you start with, isn’t necessarily what you will need, down the road. To create a Member-Managed LLC, with that single level of management, you are saying that every person who ever comes into the business will come in, willing and capable, of taking full control of the business. That may sound good in theory, but in real life, maybe not so much. What if you want to bring your children in and give them a part of the business? Are you willing to give your children that kind of control?

If I set up the LLC as a Manager-Managed LLC instead, you can have your cake and eat it too. If everyone in the beginning is hands-on, full-control people, then they can all be made Managers. You can have that single level of control. But, if things change down the road, you’ve got the flexibility to make the switch without having to do expensive amendments, and get attorneys involved.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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