Operating Structure in an LLC
When forming a Limited Liability Company the operating structure needs to be determined. There are two choices that an LLC can choose between: Member-Managed and Manager-Managed. Some states will select one of the structures as a default classification when forming a new LLC while other states require the election to be made, often as simple as marking a check in the appropriate box. Either way, it is important to know the distinction to make a well-informed decision that best suits the needs of the company and to understand how that decision shapes future actions.
The owners of an LLC are called members and operate in similar fashion to the shareholders 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 also have management decision making authority. The management and conduct of the company are vested in the members. This holds true whether there is one, two, or even more members.
The member, or members of an LLC may choose instead to delegate management responsibility to one or more managers through a Manager-Managed structure. Manager-Managed 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. Under this structure, the management is 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. A decision relating to the activities of the company will be decided exclusively by the manager or managers.
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. By contrast, if the LLC were Member-Managed the investors could participate in the day-to-day decision making of the company upon receipt of membership interest.
The Manager-Managed structure also allows for both flexibility and efficiency. The manager’s can be added or removed while ownership of the LLC stays the same. If an LLC were to have many owners, the ability for management to be delegated to one or only two key individuals would help prevent delays. Otherwise all of the members would need to reach a consensus on a decision before taking action.
A well-drafted operating agreement can be used to outline management responsibilities, and procedures for election and removal of management. The operating agreement is also a vital tool in outlining member’s authority over managers and defining the operational structure. This information is merely a guide to help bridge the gap of understanding which operating structure to choose in an LLC and does not encompass the possibility of additional factors in selecting Member-Managed vs Manager-Managed.