LLC member versus manager structure explained

If you’re forming a Limited Liability Company (LLC), there are many things you’ll need to do. After choosing a name and filing an official formation, you also need to decide what type of operating structure is best for your LLC. Managing a business is never simple, but there are two ways in which you can do so with an LLC.

In this guide, we’ll explore the main types of operating structures in an LLC and the differences between the two so that you can decide which version is best for the everyday running of your business.

What are the main types of LLC management structures?

There are two types of LLC management structures: member-managed and manager- managed. With a member-managed LLC, the members of the LLC (aka, the owners) oversee the daily governance of the company. However, in a manager-managed LLC, the owners will hand over the day-to-day administration to hired managers.

Member-managed LLC

The member, or members of an LLC may choose to manage the LLC themselves directly through a member-managed structure. Member-managed means each LLC owner has management decision-making authority, and members need to work together to decide upon everything from business strategies to office policies, and employee benefits.

In some states, member-managed LLCs are the default option; so, if you don’t choose a management structure in your Articles of Organization, the state will automatically assign your LLC a member-managed structure.

The member-managed LLC structure is ideal for new businesses that want to keep costs low since members are not considered as salaried employees. This structure type also allows members to have larger input in terms of the day-to-day running of the business, which might be ideal for startups.

Manager-managed LLC

Some owners may opt for a manager-managed LLC. In this type of structure, management of daily operations is delegated to third-party individuals. This allows owners to focus on high- level strategies and business decisions and leave day-to-day happenings to managers hired specifically for that purpose.

A manager-managed LLC allows for passive owners and investors, and is usually a good option for large businesses with many members. The manager-managed structure also allows for both flexibility and efficiency since managers can be added or removed while ownership of the LLC stays the same.

Another benefit of this structure type is that it offers more privacy to owners. Members may not want to be listed on public documents, so opting for a manager-managed structure gives owners more confidentiality.

Drafting an operating agreement

It is important to create an operating agreement regardless of the management structure you opt for. A well-drafted operating agreement can be used to outline management responsibilities and procedures for the election and removal of management. The operating agreement is also a vital tool in outlining members’ authority over managers and defining the operational structure.

At Corporate Creations we can help with the formation of your LLC. Find out more information on our LLC services here.