For many entrepreneurs, starting a new corporation can feel like a dream come true. Maybe you have a business plan in place and you know exactly where you want your company to go. But if you have any investors on board or potential ones, you will need to answer a key question: how do I want my LLC to be managed?
Depending on the number of members you have or if you want to expand your corporation in the future will influence how your business’s day-to-day operations will be controlled. To help you get a handle on how to best run your LLC, we’ll be covering the two management structures LLCs can use: member-managed and manager-managed.
Arguably the most common choice for LLCs is having each of its members act as an agent of the company. This allows each member to have a voice in the decision-making process of the company. Keep in mind that the amount of voting power each member has may be proportional to their interest in the company. For example, a member that owns 20% of the company could have more say than the member who owns 10% – but that depends on the operating agreement.
Additionally, each member of the LLC can act on behalf of the company. This means they can enter into contracts, borrow funds, and other important decisions. However, these actions still need to be approved by the other members.
In cases where each member of the company wants to be involved in the operations of the company (such as a family-owned small business), a member-managed structure will likely be the most beneficial. Businesses that have few members will be able to make decisions with those that have the most valuable input: those managing the businesses’ affairs.
Moreover, this model implies that a person seeking to invest in the corporation will also need to be involved and engaged with the business. This can be a big plus for businesses not wanting to lose control of their livelihood from investors that aren’t involved on the ground.
In contrast, member-managed LLCs are those that have specific persons delegated as operational managers. While other members still vote on some matters (e.g. dissolving the company) the day-to-day affairs are managed solely by the appointed individual(s).
Other members of the LLC are not agents of the company as with member-managed LLCs. Instead, the manager is the agent of the corporation and is typically the only individual that can enter into contracts and other financial arrangements for the business.
A centralized structure benefits LLCs that have a large number of members/investors that could impede the decision-making process. Even if you own a small business with only a few members, choosing to delegate operational duties to a manager means you can find highly qualified candidates.
LLCs that have a single manager taking control of the business also open up more opportunities for investors, as they are only investing their funds – not their time also. Startups that need to raise capital efficiently would highly benefit from a manager-managed structure.
To conclude, the key difference between member-managed and manager-managed LLCs is who controls the operations of the business. Member-managed LLCs give all the members the responsibility of running the business, whereas manager-managed LLCs centralized these duties with one individual (or more).
To give you a clearer picture of the differences between the two structures, here’s a short pro/con list for each.
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