Member Managed, Manager Managed or Managing Members? – What’s the Difference and Why Should You Care?

When you’re setting up your LLC, you’ve got 3 management options. Each one has its advantages. Each one has its disadvantages. If you want to make sure you’ve got the right choice for your LLC, you need to understand the difference!

An LLC has three operating styles to choose from.

Member Managed

In a member-managed LLC, you’ve got a single-level structure. Everyone who owns a piece of the LLC is entitled to participate equally in the day-to-day business of the company. That means everyone can sign LLC checks, everyone can negotiate on behalf of the LLC, everyone can take out loans in the LLC’s name, everyone can buy assets or sell assets in the name of the LLC, and so on.

If you’ve got an LLC with just one or two people in it, that’s probably fine. You know what each other is up to anyway, and if you’re a married couple, it doesn’t make sense for just one of you to have access to the LLC’s account. After all, what happens if your spouse gets hit by a bus and you need to access company funds for medical and living expenses?

But what if you’ve got an LLC with 10 people in it? Will it work, from an administrative point of view, to have everyone acting independently, especially when their actions will bind the whole business? That could make managing the business pretty difficult, not to mention balancing the checking account each month.

Plus, what if you’ve got a family LLC with children or teenagers owning a piece of it? There are plenty of situations where you want some people to have control of the business, while others are passive owners, receiving their share of profits but not participating in the daily running of the LLC. In this case, a Manager-Managed LLC may be your better choice.

Manager Managed LLC

A Manager-Managed LLC has a different formation structure. Now you have a 2-layer structure, where the right to operate the business is limited to only those people (or businesses) who are named as Managers. It’s like having a corporation, where the shareholders are passive, and the Officers (President, Vice-President, Secretary, etc.) are running the show on a daily basis. This can cut down significantly on confusion in cases where you’ve got lots of Members.

It’s also a great way for a family who are growing their wealth and asset base to keep control. You can have the parents fill the role of Managers, with the children acting as the passive members. Now you’ve established a form of control that leaves you free to grow the family wealth while the kids concentrate on doing what they do instead.

Even if you don’t have a family and are an LLC of one, I still really like this structure. I’ve seen it be invaluable in cases where a business owner wants to grow the business and bring in a silent partner who’s got the cash to fund the next stage of development. The silent partner wants results, but is looking at the LLC as an investment, not a lifestyle. They aren’t interested in the daily operations. The Manager-Managed structure allows you to co-exist peacefully.

Managing Member Managed

It sounds like a confusing mouthful, and it is – sort of. The Managing Member LLC is kind of a hybrid. It’s a member-managed LLC, where a group of members are chosen to run the LLC, while the rest remain passive.

The difference between this kind of LLC and a Manager-Managed LLC is in the legal distinction. When you file your Articles of Organization to form the LLC, most states will ask you to select either member-managed or Manager-Managed. But in a Managing Member LLC, you’re making the election to restrict the operators of the LLC in the internal documents – the Operating Agreement. From the state’s perspective, you’ve got a member-managed LLC.

This can be a good solution to your 10-member LLC. You can choose 2 or 3 people to act as the Managing Members, and let them take care of business. Each year, you can choose to rotate that responsibility around, as long as you’ve got a written Operating Agreement allowing you to make those changes. Typically we see this done at an LLC Annual Member’s Meeting, but you can do it at any time during the year, as long as everyone agrees.

But this isn’t my favorite solution for LLC owners. I think it’s confusing (even the name is confusing!) and because the establishment of the Managing-members is internal, you’ve got nothing on record with the Secretary of State. What happens if you’ve got someone claiming to be a Managing member of the LLC out there making business decisions on behalf of the LLC against the wishes of the other members? You could have a tough time proving who is and isn’t a Managing Member. That’s especially true if you don’t have regular LLC meetings and keep Minutes. Without detailed corporate records, I’d almost rather see you amend the LLC’s Articles with the Secretary of State to create the 2-level, Manager-Managed LLC, to provide some certainty.

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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