There are a number of reasons that business owners choose to incorporate their businesses. Many business owners reach a certain stage of operating their business where it financially and legally makes sense to transition from a sole proprietorship to an incorporated business.
The most common business types chosen by entrepreneurs are LLC, corporation or partnership. If you’re interested in forming an LLC, it’s important to recognize another important choice you’ll need to make along the way. You’ll need to choose a management structure for your LLC. As an LLC, you can choose to be:
Which type of management structure you choose will depend upon who is involved in your business and how much day-to-day involvement they want to have.
Why LLC Management Structure Is Important
The most common business entity is the LLC. An LLC, or Limited Liability Company, is a business structure that provides business owners with liability protection. An LLC shields a business owner’s personal assets and finances from the business’s debts and obligations.
An LLC is the most popular business entity designation because of the protection it offers and because it involves less paperwork to start and operate than a corporation. An LLC can have one or more owners.
If you’re the sole owner of the LLC, then you’ll have what’s called a single-member LLC. In this circumstance, you don’t need to decide between member-managed and manager-managed because you are the default member in charge of all management decisions.
If your company has multiple owners or investors, then you’ll need to consider which LLC management structure is right for your business.
The person or people in charge of the LLC can:
- Sign contracts
- Enter into agreements
- Buy and sell business assets, equipment, vehicles and real estate
- Manage LLC bank accounts
- Hire and fire employees
- Take out loans or other types of financing
The person or people in charge of an LLC have a lot of power to manage the LLC and its day-to-day operations. That’s why it’s critical to consider your LLC management structure and make sure the right people are in charge.
LLC Member vs. Manager — Which Is the Best Choice?
The right LLC management designation will depend upon a number of business factors. Before choosing your management status, you’ll want to consider the pros and cons of each.
A member-managed LLC is the automatic designation in most states and is the more common of the two designations. If you’re a single-member LLC (meaning you’re the only owner), then a member-managed LLC will make the most sense for your business.
A member-managed LLC means that all members (also known as “owners”) take part in the management and day-to-day operations of the business. Each owner/member has an equal say and vote in all business decisions. Each owner has the power to sign agreements, make purchases and take out loans for the business.
The ownership structure for multi-member LLCs can vary depending upon your operating agreement. You can choose to be a member-managed LLC but give some owners more or less voting rights, dependent upon the percentage of the company they own.
In a manager-managed LLC, the management of the LLC is turned over to designated managers. This type of LLC management structure is less common as it isn’t the default in most states.
If you choose a manager-managed LLC, you’ll need to appoint managers. If you’re wondering, “Is a manager of an LLC also a member?” the answer is maybe. An LLC manager can be a member but doesn’t have to be.
When you choose a manager-managed LLC designation, you’re giving most business powers over to the managers. Members still retain the authority to dissolve the business, but most other powers are given over to the manager.
This type of LLC is useful if you have a number of members or investors, and some of those people aren’t interested in regular management or business decisions. If a manager isn’t a member of the LLC, this is known as a professional manager.
Choosing Your LLC Management Status
Choosing the right management status for your LLC is all about understanding what’s right for your unique business.
Your LLC management status is chosen during the formation process of your business. You’ll include your management designation in your articles of organization, which are filed with the state. You can then add details about your management status in the LLC’s operating agreement. Your operating agreement can designate how the business is run, how profits are shared, the responsibilities of passive members and who holds liability for the business.
In most states, the default designation is member-managed LLC and doesn’t need to be chosen.
What Happens If I Want to Change My LLC Structure?
As a business owner, there are a lot of decisions to make. And, it can be worrisome to know whether or not you’re making the right decision. So, if you’re wondering, “Can I change an LLC from member-managed to manager-managed?” the answer is yes.
You can change your LLC management designation later if you need to. This might happen if you gain passive investors or bring on new LLC members. To change your management status, you’ll need to amend your operating agreement.
What to Consider When Choosing a Member-Managed LLC Vs. a Manager-Managed LLC
Your business is unique. To know which management designation is right for your business, here are some important factors to consider.
Member-Managed LLC Considerations
- Great for smaller companies where all members want to be involved in the decision-making process.
- It's not the best choice when there are a lot of members involved because it can get confusing and cumbersome to run the company.
- Consider: Whoever is a member of the LLC is allowed to participate equally in the day-to-day management of the company. If you have two members, you can discuss these actions and track each other's spending more easily than if there are 10.
Manager-Managed LLC Considerations
- Having a manager can simplify the decision-making process — especially if some members want to be passive or don’t have a lot of previous business experience.
- As an entrepreneur, you know your product or industry inside and out — but that doesn't mean you have the experience or education to run a business. Hiring a trusted manager who has this knowledge can be a great asset.
- This is a great option for businesses that are transferring ownership. For example, let's say mom and dad own a restaurant, and the kids want to get into the family business. If mom and dad are the managers, they still can have the power to make big decisions while they're training the kids (who are LLC members) how to run the operation. If the kids are passive owners, they can share in the profits, too.
- An LLC protects personal assets, but decision-makers are held liable for the choices they make on behalf of the businesses. If something happens that causes legal scrutiny, the manager is more accountable than passive members.
Are you ready to take the leap and create your LLC? At Incfile, we offer a $0 LLC where we help you file your LLC paperwork at zero cost to you. We can help you get started today.