For someone who has never started a business, the process may seem as simple as choosing what you want to sell and then presenting that product or service to the public. However, owning a business in real life is a lot more complicated than that.
There are business entities to consider, potential investors to negotiate with, copyright laws to abide by, marketing strategies to plan and so much more. One aspect that many entrepreneurs fail to consider is whether to have a Manager-Managed LLC vs. a Member-Managed LLC. So what do these terms mean, and which one is right for your unique business?
What Is a Member-Managed LLC and Manager-Managed LLC?
An LLC is a Limited Liability Company — its simplicity and greater flexibility than other types of business entities makes it perfect for small businesses. Additionally, forming an LLC protects your personal assets if your business gets sued or goes into debt. People who are owners in an LLC are called “members.” An LLC can have one member or multiple members who own the company.
A Member-Managed LLC means that all members take part in the management and operation of the business. Let’s say that certain members want to change site locations or are considering adding members to the LLC. All members have an equal vote to determine majority opinion and decide what the company should do.
In contrast, a Manager-Managed LLC appoints decision-making power to a manager or managers who may or may not be members of the LLC. For example, if you have five members in your LLC and three just want to be financial investors, the other two could be appointed as managers to run the operation. Depending on your state restrictions, a manager can also be another LLC or a corporation. This is beneficial if your members lack the knowledge or experience it takes to run a successful business, and you want outside help.
In most states, if you don’t indicate in your Operating Agreement how your LLC is managed, you’ll default to a Member-Managed LLC. This is important to note because an Operating Agreement outlines how the business is run, the division of responsibilities and how profits are shared. For example, If your LLC has passive members who aren’t involved in running the business, you can specify that they aren’t held to the same liability as the active decision makers/managers. All members should be made aware of their roles to avoid complicated conflicts down the road and to protect their individual rights.
Should You Choose a Member-Managed LLC or a Manager-Managed LLC?
Since every business is unique, here are some factors to consider when deciding which management option is best for your situation:
- Great for smaller companies where all members want to be involved in the decision-making process.
- 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, which means that everyone can sign LLC checks, negotiate on behalf of the LLC and perform other critical tasks. If you have two members, you can discuss these actions and track each other’s spending more easily than if there are 10 people running the company.
- If you have many members, it can be difficult to get everyone on the same page (or maybe some members just want to be investors). In this case, having a manager can simplify the decision-making process.
- 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, so you can focus on product development and doing what you’re best at. This can also give investors confidence that someone with business savvy and a positive track record is at the helm.
- 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.
If you’re still not sure which option is best for you, our business specialists at Incfile are here to help. We know that choosing the right entity and deciding how to run it are huge decisions, and that filing legal documents can be intimidating. Incfile has helped more than 250,000 companies, and we’re ready to partner with you.