Operating structures in an LLC. How you want your company managed, matters now.
When forming a Limited Liability Company (LLC) one of the first things you’ll need to consider is what you want your operating structure to look like. Determining whether you want a member-managed operating structure, or a manager-managed operating structure makes the difference in how your company functions going forward.
But first, what’s the difference? Understanding the distinction between the two types of operating structures can help you make a well-informed decision best suited for the needs of your company.
What is a member-managed LLC?
Owners of an LLC are referred to as members and operate in a similar manner as shareholders do of a corporation. The member, or members of an LLC may choose to manage the LLC themselves directly by means of a Member-Managed structure. Member-managed means ALL of the owners of the LLC have management decision making authority. The management and conduct of the company are vested in the members, holding true no matter how many members there are. If the LLC is member-managed, investors have the option to participate in the day-to-day decision making of the company upon receipt of membership interest.
What is a manager-managed LLC?
The member(s) of an LLC may choose instead to delegate management responsibility to one or more managers through a Manager-Managed structure. This structure allows for selected individuals, whether or not a member of the LLC, to be in a position to run the day-to-day decision-making, similar to an officer of a corporation. The manager’s selected may be all of the members, a select number of the members or even non-members of whom are exclusively responsible for decision making related to the activities of the company. A manager-managed LLC allows for passive owners and investors. Membership interests may be issued without including a right to participate in the management of the LLC.
The manager-managed structure allows for both flexibility and efficiency. The managers can be added or removed while ownership of the LLC stays the same. If an LLC were to have several owners, the ability for management to be delegated to one or two key individuals helps prevent delays. Otherwise, all of the members would need to reach a consensus on a decision before taking action.
Once you’ve decided on your operating structure for your LLC, you’ll need a well-drafted operating agreement. No matter how your LLC is managed, your operating agreement outlines management responsibilities and procedures for election and removal of management. The operating agreement is a vital tool in outlining member’s authority over managers and defining the operational structure in an LLC.