Your LLC – Manager or Member Managed?

When you’re first planning your new LLC, you may come up against the question, “Do you want your LLC to be Member-Managed, or Manager-Managed?” Before you answer, make sure you understand the question!

A Member-Managed LLC is kind of like a cooperative. In a perfect world, everyone participates equally, in the decision-making, in the management and, especially, in the day to day work. That can work really well for some LLCs, but not so well for others. Imagine a 30+ Member LLC, where every Member has the same rights to manage the business, act on behalf of the business, sign checks, and so on. The opportunity for chaos grows with every new Member added … along with the potential for a huge cash flow problem and more.

In a Manager-Managed LLC, the members become more passive. They elect one or more individuals to look after the management of LLC business instead. A Manager-Managed LLC looks more like a Corporation in that sense – where you have shareholders who aren’t involved in the day to day business, and the Officers/Directors, who are.

How much control Managers have depends on how the Operating Agreement is worded, and on state law. Typically Managers have a lot of control, but you can establish checks and balances, including how Management actions can be reviewed by Members, what actions need Member approval before proceeding, and how Managers may be removed or re-elected.

When someone comes to me asking which is better, I will almost always say Manager-Managed. I like the ability for some owners, who don’t want to actively participate, to have that opportunity. In a family business, where children may hold some of the LLC’s ownership, this can be a great way for parents to retain management control. If you’ve got an older child who is capable of assuming management duties, that child can be appointed a Manager at any time.

There is no limit on the number of Managers an LLC can have. So, if you’ve got a small group with big dreams, you can start off all the founder Members as Managers. Now you can bring on passive investors as Members, without necessarily giving them a seat at the boardroom table. Plus, if and when founding Members want to take a step back, they can do so easily, without disrupting their ownership.

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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