After you’ve chosen to structure your company as a limited liability company (LLC), choosing your LLC’s management structure is the next critical decision you must make during the LLC formation process.
You can choose from either a member-managed LLC structure or a manager-managed LLC structure.
Your limited liability company can be managed by LLC members as a member-managed LLC, or by LLC managers as a manager-managed LLC. These terms are complicated, so I’ll explain both structures in more detail and give you all the information you need to make the right choice for your company.
What Is a Member-Managed LLC?
In a member-managed LLC management structure, the limited liability company is managed by the owner or owners of the LLC, also called members. One or more members control the day-to-day operations of the company, and all the members can take part in contract signings and influence day-to-day decisions about the company.
Many small business owners choose the member-managed LLC structure for their businesses.
What is an LLC member?
When you’re learning about member-managed vs. manager-managed LLCs, it’s important to know the difference between a member and a manager.
The words “LLC member” and “business owner” mean the same thing.
An LLC member owns a percentage of the LLC.
In all 50 states, you can create either a single-member LLC or a multi-member LLC. With single-member LLCs, one person owns the company, whereas multi-member LLCs are owned by more than one person.
There’s no limit to the number of members your company can have. However, if you choose to set up your LLC as an S corporation for tax purposes, you are limited to 100 shareholders.
What Is a Manager-Managed LLC?
In a manager-managed LLC structure, one or more managers run the company. To understand member-managed vs. manager-managed LLCs, remember that in a manager-managed structure, the members appoint a managing member to take care of such activities as handling company debts, hiring employees or an independent contractor to work in the office, and managing business bank accounts.
Managers needn’t be chosen from within the company, and in fact you have the choice to hire a professional manager. The LLC manager in a manager-managed LLC makes a promise to take part in the day-to-day running of the business, as well as managing day-to-day operations behind the scenes, such as signing contracts and creating new policies that affect the whole company.
Managers are allowed to appoint officers to help with their duties as well. The officers don’t have any decision-making power within the company and they don’t have any of the perks of being an LLC manager, such as liability protection, because they don’t have the same authority as managers and don’t need to worry about being personally liable for the company.
A manager-managed LLC is also referred to as “centralized management.” This is because all the authority is centralized in the hands of the managers.
Under a manager-managed structure, members don’t sign contracts or play a role in day-to-day operations. Members vote one or more managers in and can remove LLC managers, as well. But once the members have chosen the LLC managers, they step back and let the LLC managers do most of the work.
Some states require you to list the management structure of your LLC on your formation documents (such as your LLC’s Articles of Organization). Other states allow you to choose the management structure of your company more internally. Check the state law where your business is located to find out whether you need to list your LLC’s management structure in your formation documents, or if you can simply list it in your operating agreement.
What is an LLC manager?
The word “manager” makes you think of “general manager” or “store manager,” but an LLC manager is far different. Instead of being promoted to store manager, an LLC manager is a title that’s regulated by the state government.
LLC managers are chosen by the LLC’s members. They can choose someone from their LLC members to be a member-manager, choose a trusted employee from within the company, or choose to hire a professional manager from outside the company.
When a person assumes the role of LLC manager, they have the legal authority to make decisions on behalf of the company and manage the day-to-day operations of the business.
Here are some of the things an LLC manager can do:
- Open a dedicated LLC bank account.
- Enter the company into contracts or agreements.
- Make financial and legal decisions for the company.
- Purchase and sell physical assets for the company, such as vehicles or real estate.
- Dispose of or withold LLC assets.
- Obtain funding or loans for the company.
- Hire staff, e.g. a new employee or independent contractor.
No matter what, your LLC manager has a legal obligation to act in the best interest of the company.
How Is a Single-Member LLC Managed?
Often, a single-member LLC will choose a member-managed LLC structure. But a single-member LLC can also be manager-managed, and there are arguments for both member-managed vs. manager-managed single-member LLCs.
On paper, it may seem a little redundant, but there’s a good reason for a single-member LLC to choose a manager-managed structure. The owner of a single-member LLC can choose to list their LLC as being manager-managed on record because they don’t want to be publicly listed as owner of the company.
So, although it may seem as though these owners are looking for a way to make their titles seem slightly elevated, it’s more of a liability issue than status-chasing.
It’s not obvious in legal documents whether an LLC manager is an LLC owner. The only document that would list them as an owner, as well, is the LLC operating agreement, which usually doesn’t need to be filed.
So, by choosing a manager-managed structure LLC owners maintain ownership of their LLC, as well as protecting their privacy.
When you own a member-managed LLC, all your LLC’s members have the legal authority to make decisions for the company and manage its day-to-day operations.
In a multi-member LLC, all the members act together in a business partner relationship.
All members of a member-managed LLC dive in and get their hands dirty with their member-management duties. Each member has an active role in not only the daily operations of the business and their management responsibilities, but also in decisions that affect the company’s future.
A member-management structure is also referred to as “decentralized management.” This term reflects the distribution of power among numerous members rather than the centralized power of a manager-management scenario.
If the LLC members decide that they don’t want to manage the day-to-day tasks, then they elect a manager. If they choose one of their own LLC members to manage the company, this person becomes the member-manager, working and making decisions on behalf of the LLC’s members.
Member-managed LLC by default
In the states that require LLCs to list their management structure on their formation documents, they will declare your company a member-managed LLC by default if you don’t specify your management structure.
You need to make sure that all the members have signed the LLC operating agreement to ensure that the state doesn’t make your business a member-managed LLC by default.
Who should choose a member-managed structure?
Knowing the difference between a member-managed vs. a manager-managed LLC is hard enough, but choosing between the two is even harder. The good news is there are a few instances in which a member-managed LLC makes more sense.
If you only have a handful of members, a member-managed structure is a good choice for you. For instance, if you own a family business in which you want a few family members to share responsibility, then member-management is your best bet.
If each of your members is willing and able to be actively involved in making business decisions as well as the financial decisions for the company, then you can consider a member-managed LLC. But if one or more members seem reluctant to take on an active role in the decision-making process or daily operations, this probably isn’t the best structure for your situation.
Member-managed LLCs are most popular
In most cases, business owners choose the member-managed structure. Member-managed LLCs are simpler and involve less hassle than the manager-managed structure.
When you choose a manager-managed LLC, you can do this in three different ways, which I call “internal,” “external,” and “hybrid.”
“Internal” manager-managed LLC
This isn’t a real business term—I’m just using it to help you understand the concept.
An internal manager-managed LLC is a term that I use to describe a manager-managed LLC in which one of the members is chosen as a member-manager. It’s a way for the members of a member-managed LLCs to say “I don’t want to do that. You do that,” and give the work and responsibilities to another LLC member. It also prevents the company from needing to hire a third-party, professional manager, keeping the management in-house.
For example, let’s say that a member-managed LLC has four members. Two of these members primarily bring in money for the company but don’t take part in any other business operations. The other two members bring in some money but primarily handle business operations like contracts and property acquisitions. In this scenario, the first two members are LLC members, while the latter two are managers.
The LLC members who elect the managing member become passive members, and take on less responsibility.
This is one type of manager-managed LLC.
“External” manager-managed LLC
The difference between an internal manager-managed LLC and an external manager-managed LLC is that the manager appointed to take responsibility for the LLC isn’t a member. This sort of manager is often a professional manager that comes from an outside source.
In an external manager-managed LLC, the members become passive members. This means that not only do they have less responsibility in the company, they also don’t take part in daily management tasks, instead letting the manager handle it.
For example: An LLC has two members in one state who want to conduct business in another state. They hire an employee who lives in that state to manage the business operations there. That person is now their LLC manager.
“Hybrid” manager-managed LLC
In this management structure, LLCs have “internal” and “external” managers working together.
For example: A member-managed LLC has four members, and two of these members are simply that—members. The other two are member-managers. Then the four members choose to hire a real estate expert to help manage their team and expand their business. This means that there are now two members, two member-managers, and one manager.
Authority in a manager-managed LLC
One important distinction in the manager-managed business structure is that managers or managing members have sole authority to make legal or business decisions for the company.
Other members (without manager designation) don’t have the authority to enter into contracts, handle the daily operations of the business, or make business decisions for the company. They’re largely left out of the decision-making process.
But just because members have a hands-off role in the affairs of the business doesn’t mean they can’t influence decision-making. They can give advice to managers and tell them what they think, but ultimately the managers don’t have to make decisions based on what the members think.
Managers have the autonomy to make their own business decisions, which means they can do exactly the opposite of what the LLC’s members have advised them to do, if they wish. The degree of their autonomy from members depends on the instructions laid out in the LLC’s operating agreement. So if you don’t want your managers going against your will, you need to spell that out in your operating agreement.
This doesn’t mean that members don’t have any power. On the contrary, if members vote in agreement to do so, they can remove a manager. They can also appoint new managers that suit their interests. Only members can add or remove managers. This power comes with stipulations, however. All the members must agree to the changes, and they have to put their agreed-upon changes in writing. The details about the procedure for members to vote out managers is something you should list in your operating agreement so that there’s no room for confusion.
Who should choose a manager-managed structure?
There are a couple of scenarios in which you should consider manager-management. If you have a large number of members, it’s a good idea to consider a manager-managed LLC and appoint a manager (or a few). It’s also a good idea to consider a manager-management structure if some members don’t want to take part in the decision-making for the company and would rather be passive investors.
For instance, if a company with 40 members decides they want to form an LLC, but most of them don’t have time to make decisions and carry out important work for the small business, then they can appoint a manager or managers, to run the company for them in exchange for a reasonable salary.
Can I have someone else sign on behalf of my LLC without appointing them a manager?
You don’t have to have managers or managing members. You can appoint someone to sign contracts and agreements for your company without awarding them manager status. This position is typically known as an Authorized Individual, or Authorized Party.
You grant an Authorized Party or Authorized Individual the authority to enter contracts or agreements on behalf of your company through a legal document called an Authorization Agreement or Resolution.
An Authorized Party has more restrictions than a manager-management provides, which can be beneficial to you if you don’t want someone to have free reign of your company. But it can also be limiting in that they can’t make decisions for the business the way managers can.
If you like the idea of an Authorized Party or Authorized Individual more than manager-managed LLCs, consult a business attorney to help you draft the contract so you get the most out of the agreement.
Free operating agreement template for manager-managed LLCs
If you decide on a manager-managed LLC rather than a member-managed LLC, then of course you need to explain that in your company’s operating agreement. It’s important to include information about your management structure in your operating agreement, even if state law doesn’t require you to create or file one.
Northwest Registered Agent provides a free manager-managed LLC operating agreement template so that you can customize it to suit your needs. Here are two versions of the operating agreement templates: Word or Google Docs.
You don’t need to get your operating agreement notarized
Whether you choose a member-managed or a manager-managed LLC management structure, it’s worth knowing that your operating agreement doesn’t need to be notarized. When the members or managers sign the operating agreement it’s legally binding.
However, some business owners choose to have their operating agreements notarized anyway because it adds an extra layer of legitimacy to their LLC.
Other LLC Activities
Creating an operating agreement is a major part of LLC formation for most businesses. But it’s not the only task you’ll need to complete before your LLC has the proper business foundations to succeed. Here’s a look at some of the other tasks you’ll need to complete.
Articles of Organization
You need to get your hands on an Articles of Organization form. In some places this is called a Certificate of Formation, but no matter its title, this is the primary formation document for LLCs in your state.
Information you need to put on this form includes your business name, address, registered agent, and the signature of the person who organized the formation of your LLC (which can be you). You can typically find the form on the website for whichever governing authority presides over LLCs in your state (it’s typically the Secretary of State, but this isn’t a concrete rule).
Carefully choose your business name
Most states have rules regarding what you can name your LLC. For instance, you can’t typically use the words “bank” or “financial institution” because banks and insurance companies can’t form LLCs. Some states require LLCs to put words like “LLC” or “Limited Liability Company” in the business name. You’re also not allowed to use a business name that’s already been reserved by another business.
It’s easy to check the availability of a name, however. Just go to the website for the agency that regulates LLCs in your state and perform a search on their business name database.
Choose a registered agent
As I mentioned previously, you’ll need to list your registered agent on your formation documents. But that’s not the only reason that choosing your registered agent is important.
A registered agent is a person or business that accepts mail, legal documents, and service of process on behalf of your business during business hours. They also help protect your information, maintain your privacy, and help you stay up to date with the compliance regulations imposed on LLCs by your state.
For more information about registered agents, read my review of the best registered agents.
Pay taxes or file annual reports
Many states require LLCs to either pay an annual tax or file an annual or biennial report, while a few states require both. It doesn’t matter which of these requirements your state stipulates, it’s a way for them to ensure that they keep updated information about your business on file, while also collecting a fee. And we all know that it’s the fees that keep the lights on at government agencies that regulate LLCs.
It’s also important to remember to file these reports or pay the taxes because if you forget, the Secretary of State might decide that your LLC isn’t in compliance with state laws, which could result in your LLC being disallowed to conduct business in the state.
Permits and licenses
In most states, your LLC will be required to obtain a business license from the state government, at the least. There are other instances in which you’ll be required to obtain business licenses or permits from your local government, as well. This typically happens if you sell products and collect sales tax. (You may need to register with the state government to qualify your business to collect sales tax, as well.)
It’s usually quite simple to apply for business licenses and permits with the local government. Simply inquire about permits and licenses with the local government with jurisdiction over the area where your LLC conducts business.
Get an EIN
If you plan on hiring employees or opening a business bank account you’ll need an EIN, or employer identification number. It sounds like something fancy or complicated, but in reality it’s just an identification for businesses that functions similarly to a social security number, and also qualifies businesses for certain licenses and permits.
If you want to qualify for these licenses and permits but don’t want to hire employees, don’t worry. You can obtain an EIN regardless of how many employees you hire (or don’t). All you have to do is go to the IRS website to apply for an EIN Monday–Friday between 7 a.m. and 10 p.m.
Business bank account
You should open a business bank account because if you don’t, you risk “piercing the corporate veil,” which means that you can totally negate all the limited liability and personal asset protection that forming an LLC affords you. This is why you shouldn’t run business transactions through your personal bank account.
Luckily, it’s easy to open a business bank account. All you have to do is create a “bank kit” containing several formation documents, such as your Articles of Organization, operating agreement, EIN, and the initial resolution for your company.
It’s not hard to create your own bank kit, and most banks will provide you with a list of the documents necessary to open a business bank account. But if you don’t want to do it yourself, most LLC formation companies take the headache out of this task by creating a bank kit for your business as part of their formation services.
It’s incredibly important that you choose the right management structure for your LLC, so consider it carefully without making a snap decision.
Before deciding, consider your business and any other members and think about the answers to these questions:
- How many LLC members does your small business have?
- Can your LLC members commit to the high level of management work required to keep the company running?
- What do your members say they want when it comes to things like big-picture decisions that will affect the future of your small business?
While you’re learning about LLC management structures, it’s a good opportunity to learn more about how to form an LLC, as well. If you’d like to know more about LLC formation, then check out my article “How to Start an LLC”.
Since LLC formation services are such a crucial part of starting your LLC, it’s important to ensure that you choose the right one. They can help you with everything from drafting an operating agreement for your company to submitting your Articles of Organization, and they’ll ensure that your company is in good legal standing with the Secretary of State.
To find out more about what an LLC formation service can do for you, and learn about the best LLC formation service, check out my article about the best LLC services.