3 min read
Before we dive into this topic, first, some guidance that not many attorneys will tell you: this question doesn't matter that much for single-member LLCs.
(It matters a LOT more for multi-member LLCs).
Here's a good way to check the veracity of that claim -- ask a dozen attorneys this question: "I'm forming a single-member LLC. Should I be member-managed or manager-managed?"
My guess is -- about five will say "member-managed," another five "manager-managed," and a couple will tell you it doesn't matter. So, if the experts disagree, then it's probably not worth scratching your head too much over.
That being said, let's go over a bit about each management style and then I'll tell you what we recommend for the most minor of reasons. And when you finish this, check out our step-by-step creating an LLC guide.
What is a Member-Managed LLC?
In a member-managed LLC, the members are responsible for managing the company. This means that the members have a say in all major decisions and are involved in the day-to-day operations of the business. This is the most common type of LLC management structure, particularly for small businesses.
One of the advantages of a member-managed LLC is that it allows for more direct control by the members. This is particularly beneficial for small businesses where the members may have specific knowledge or skills that are necessary for the operation of the business. Members can easily communicate with each other and make decisions quickly, which can be important in a fast-moving business environment.
However, this can also be a disadvantage if the members do not have the necessary expertise or experience to manage the business effectively. In some cases, a member-managed LLC may become bogged down in decision-making processes or may make poor decisions due to a lack of experience or expertise.
What is a Manager-Managed LLC?
In a manager-managed LLC, the members hire a manager to run the day-to-day operations of the business. This type of management structure is more common in larger LLCs or those with more complex operations.
One of the advantages of a manager-managed LLC is that it allows the members to focus on the big picture and leave the day-to-day operations to a professional manager. This can be particularly beneficial if the members do not have the time or expertise to manage the business themselves. The manager can bring experience, expertise, and a fresh perspective to the business.
There are also some disadvantages to a manager-managed LLC. One potential issue is that the manager may not have the same level of commitment to the business as the members. In addition, the members may feel less connected to the business if they are not involved in day-to-day operations. This can lead to a lack of engagement or motivation on the part of the members.
To wrap up, small businesses with a limited number of members may prefer a member-managed LLC, while larger or more complex businesses may benefit from a manager-managed structure.
Guiding Factors in Choosing Your LLC Type
When deciding between a member-managed or manager-managed LLC, pinpointing the right choice requires focusing on four determinants:
Size of Your Business
Examine your business structure. If it’s a small, close-knit unit where all members are interested in managing operations, choosing a member-managed LLC would be preferable. On the flip side, a larger business with numerous members often benefits from a manager-managed structure.
Collective Management Skills
Assess your collective skills. If members have the necessary business management expertise to handle both daily tasks and strategic decisions effectively, a member-managed LLC could work best. Alternatively, a manager-managed LLC would be the right choice if you need to hire outside expertise for smooth operation of your business.
Investor Involvement
Understand your investors' anticipated level of involvement. If your investors prefer a silent role, choosing a manager-managed structure would be beneficial, allowing them to remain hands-off in the daily operations. However, if they plan on active participation, a member-managed structure would be fitting.
Legal and Taxation Implications
The decision also hinges on legal and tax implications. Engaging a business attorney or tax consultant for guidance is prudent, as understanding how your state laws and the IRS view your LLC structure is crucial.
Changing The Structure
Remember, it's possible to change the management structure of your LLC with procedures including revising your operating agreement and securing member vote for the switch. However, as regulations vary from state to state, legal consultation is advisable before making any modifications.
Next Steps
As I noted earlier, the difference isn't much for single-member LLCs. It's a bit of a wash. You can learn more about forming an LLC in our step-by-step guide. And if you need an operating agreement for either management style, grab one of our templates on this guide.
Do you need a lawyer for this?
The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes (especially if you have multiple owners). But often for single-owner businesses, you don't need a lawyer to start your business.
Many business owners instead use tools like Legal GPS for Business, which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.