Congratulations! You’ve struck out on your own and formed an LLC!
On top of all the work you’ll have to do to get your limited liability company off the ground, you’ll also need to outline sections in your articles of organization and your LLC operating agreement about what sort of management structure you wish you use for your LLC.
It’s true that most LLCs are managing-member LLCs. But you shouldn’t pick that format for that reason alone. You should understand the ins and outs of a managing-member LLC before you choose it for your business.
Here’s everything you need to know about managing-member LLCs.
LLC Management Structures
Before you can choose your LLC’s management structure, you need to know how each LLC management structure works. Here’s what you need to know about various management structures:
Member-Managed LLC
With a member-managed LLC, all the members work like managers. They take part in all of the day-to-day operations and have the authority to make business decisions on behalf of the company, even entering contracts.
With this structure, the LLC members are referred to as “managing members.” Most LLCs are member-managed. It’s the simplest management structure to choose from, and it’s therefore the most popular structure.
This structure is the focus of this article, but to help you understand fully, I’d like to quickly describe two other common LLC structures.
Manager-Managed LLC
With a manager-managed LLC, the LLC members are solely the owners of the company but not directly involved with the day-to-day operations. They can’t enter into contracts on behalf of the business, but they still retain ownership of the company.
The management of the business is handled by an LLC manager (or LLC managers). This is typically someone who isn’t an LLC member.
In some cases, one manager makes all the day-to-day decisions for the business and also oversees operations. In other cases, it could be a handful of managers who are required to vote on important company decisions.
Individuals, a group of people, or business entities can serve as LLC managers. Check your state law to see who qualifies. In many places, you can hire a professional manager.
Single-Member LLC
If you own a single-member LLC, then you’re considered the LLC’s manager. You’re also the sole authority of the business. That is, of course, unless you choose to hire an outside manager or professional manager.
LLC Titles
So those are the structures, and they’re defined by certain roles and titles within the business. Here’s a bit more about those titles.
LLC Member
Before I explain how a managing-member LLC works, first you should know what exactly an LLC member is. If it sounds self-explanatory, well, it is. But hear me out. An LLC member isn’t just a member of the LLC, they’re an owner of the LLC — any person with ownership interest in the company. An LLC could be a single-member LLC or a multimember LLC.
Unless you have a manager-managed LLC, or you’ve specified otherwise in your LLC’s operating agreement, LLC members help with the management of the LLC. The company’s operating agreement should assign the powers and duties of your LLC members.
Corporate officers or employees can be LLC members, but not every employee or officer is a member. They must have ownership interest in the business to be an LLC member.
LLC Manager
Most LLCs choose the member-managed LLC structure, but a manager-managed LLC might be the better option in certain situations.
With a manager-managed LLC, the company is managed by one manager, which can be an outside party or professional manager. There’s also the option to designate a group of LLC members as managers, or even just one member.
In a manager-managed LLC, any non-managing members are simply considered LLC owners, but don’t actually take part in the management of the company or retain authority to enter contracts for the company. The powers of LLC members and managers should be spelled out in your operating agreement.
Other LLC Titles
Unlike corporations, LLCs don’t have to observe the same strict guidelines about organization and titles, and you can use that to your advantage. This means that you can choose a title that makes your company seem staunch and professional, or laid back and fun.
(Of course, corporations have fun titles too. For example, Elon Musk is Technoking of Tesla.)
Choosing a title as an LLC owner can be difficult and confusing. If you have a managing-member LLC, and you own the LLC (or a portion of it) then you should choose “managing member” because it specifies that you own the business and manage it.
Here are some of the titles you should avoid as a managing-member LLC:
- Director: Directors are linked to corporations. Corporations are required to have a board of directors, rather than LLC managing members or managers.
- Shareholder: LLCs don’t typically have shareholders, they have members. Shareholders own stock in the company and retain voting rights, so they’re quite different from LLC members.
- Corporate officers: An LLC can choose to use corporate titles, like president, vice president, treasurer, etc. But because these are corporate titles, it can be confusing for an LLC to use them.
- Proprietor: If you own an LLC, it’s not a sole proprietorship, and therefore should no longer retain the title of “proprietor”. A proprietor doesn’t get limited liability protection. It’s also a misleading title that could cause people to think you own a small business and are the sole owner.
- Managing partner: Using this title, or any variation of it, could hint that you have a business partner or are in a partnership, rather than an LLC.
- Made-up titles: It may seem cute to give your cousin a title like “Senior Vice President of Goofing Off,” but it’s not a good idea to assign titles with no merit or meaning. We don’t care what Elon Musk may have told you to the contrary.
Managing-Member LLC
So, now that you know what a member and a manager are, let’s talk about managing members.
A managing-member LLC is a member-managed LLC. This is when all the members take on the responsibility of managing the business, and have the authority to enter contracts and make decisions for the company.
The difference between a member and a managing member is that while they both own the company, a managing member also manages it. Some states also designate “LLC managing member” as its own separate title.
A managing-member LLC may be the best choice for your business in certain cases:
- You don’t want to use a corporate tax structure.
- You want an easy way to bring in passive investors.
- You want to be actively involved in your business’s management.
- You don’t want someone else telling you what to do with your business.
- You want all of your members to be responsible for the daily operation of the business.
- You’re a single-member LLC.
Managing-member LLCs are great for small businesses with a limited number of investors. You can streamline the management of your business and be directly involved in it. Often, member-managed LLCs distribute responsibility between members in much the same fashion that partnerships do, but with the added advantage of limited liability protection for its members.
As the name implies, a managing-member LLC means that if someone wants to become an investor in the business, they also have to take part in managing it. While that’s not always the case, it is the most popular model.
Some businesses choose to only provide authority to members who have invested a specific amount of time and money into the company. Or to one person with specific experience.
LLCs allow you a lot of leeway to choose how you want to set up your management structure. If you want to set up qualification criteria for your managing members, you should do so in your operating agreement, and probably consult an attorney.
You can have as many managing members as you want. But the more managing members you have, the more complicated it becomes to create your operating agreement. Without an operating agreement in place to act as a contract between these members, arguments and disagreements between these members could crop up.
If you have a big LLC with lots of members, then you may choose to split up these members into groups, with one of them designated as a managing member from each group to represent them.
What Are the Responsibilities of a Managing Member?
A managing member is responsible for the business operations of the company on a daily basis, including everything that happens to the company, as well as solving problems when they pop up.
They also have the authority to represent the company — both publicly and in legal matters. If the company encounters legal trouble, managing members can represent the company and become its voice in court.
Managing members can choose which companies and vendors the business works with, and enter into contracts with them on behalf of the company. This means their signature on contracts is valid and binding.
Because they’re in charge of business operations, they’re responsible for hiring and firing employees. They’re also in charge of balancing the company’s books and keeping it on a budget, as well as making sure it’s meeting its financial obligations.
In short, if you own a managing-member LLC, then there’s really no aspect of your business management that your managing members don’t have their fingers in.
Operating Your Member-Managed LLC
A managing-member LLC may have multiple managing members, which makes your business’s structural organization a bit more complicated than that of a single-member LLC or some manager-managed LLCs. But there are some things you can do to ensure swift and efficient operation of your managing-member LLC.
In a managing-member LLC with multiple managers, you and the other managing members work together as partners. You should all understand your roles and responsibilities, and know how to carry them out. This should be detailed in your operating agreement, along with other instructions for LLC management.
Here are a few of the things your operating agreement should include to ensure efficient operation of your member-managed LLC:
- The voting rights of LLC members
- Distribution arrangements
- A list of LLC members
- The ownership interests of LLC members
- Shares of profits and losses for members
- Management responsibilities of members (which is especially important for managing-member LLCs)
- The voting rights of members
For more information about how a proper operating agreement can set your company up for success, read my article all about operating agreements. And click here for an operating agreement template!
Member-Managed LLCs vs Manager-Managed LLCs
Most states require you to disclose the management structure of your LLC on its formation documents. This means you’ll need to choose whether your LLC will be managed by each of its members, by one person in your company that you designate as a manager, or by a third-party manager.
If your LLC is run by its members, then it’s a member-managed LLC, and managing members run it.
If your LLC is to be run by a handful of members (not all of them), by one manager, or by an outside manager, then it’s a manager-managed LLC.
Even if you live in a state that doesn’t require you to specify your LLC’s management structure on your formation paperwork, you’ll still need to choose a management structure in order to create your operating agreement.
Is a Managing-Member LLC the Best Structure?
No one business-management structure is superior. They’re all suitable for different situations. With that being said, most multimember LLCs choose the managing-member LLC structure because of its simplicity. This means they’re managed by members.
A lot of LLC owners are small business owners, and they’re either the sole owners of their business or a small group of owners. Most times, all the owners are willing to take part in both the daily operations of the business, its management duties and management decisions, and the important overall business decisions.
It’s a good system because it’s collaborative and no single person has to carry the weight of the entire business. If members each have different strengths and skills they can apply to management, the business is stronger. If one managing member goes on vacation, the business doesn't shut down.
But that doesn’t mean it’s the only good system.
Conclusion
There’s a lot to learn when you start a new business, and even more if you choose to form an LLC. One of the most important decisions you need to make is the management structure of your LLC.
If you own a multimember LLC, it will likely benefit you to choose the managing-member LLC structure. With this format, all your members become managing members, and they each play a role in the management of the business.
If you’d like to learn more about LLC formation, read my comprehensive guide on How to Start an LLC. And if you’d like some additional guidance through the complicated formation process, read the Best LLC Formation Services.
