The business structure plays a vital role in the operations and regulatory requirements of a company. A Limited Liability Company (LLC) is a highly popular business structure that blends the flexibility of a partnership with the liability protection of a corporation. Owners are safe from personal liability for business debts and benefit from favourable taxes. Choosing the right business structure is of great importance for the growth of a business.
The primary goal of this article is to help multi-member partners decide which management model best suits their needs. It is important to understand that the difference primarily lies in who manages daily operations and how control and decision-making are allocated. If you’re wondering about the difference between member-managed vs. manager-managed LLCs, this article is for you. The article also explains the cons and pros of member-managed vs manager-managed LLCs.
What Is a Member-Managed LLC?
A member-managed LLC is a business structure in which all the members are actively involved in the day-to-day management of the business. Each member is authorized to make decisions for the company, sign contracts, and represent the company in business matters. Member-managed LLC is usually the default management structure of LLCs in most states unless otherwise specified in the LLC’s operating agreement.
Some typical scenarios or business types where member management is common are startups, small businesses, and closely-held LLCs. Members of member-managed LLCs are responsible for overseeing employees, managing client relationships, and controlling finances.
Members-managed LLCs: pros and cons
Member-managed LLCs offer numerous benefits, such as simplicity, low costs, direct control, and faster informal decision-making. Having no managers in the LLC streamlines the process and provides simplicity. The extra payroll expenses for managers are eliminated when members manage the company. The operations and decisions are directly in the hands of the members. The decision-making process is fast and informal in member-managed LLCs.
Although member-managed LLCs offer several benefits, there are some drawbacks, too. Time commitment, investor limitations, and potential for conflict are common drawbacks of member-managed LLCs. Members are required to maintain a balance between operational duties and strategic goals. Differences in opinions can slow down the processes, which may result in reduced investments in the business.
For instance, a small photography firm with three members can choose the member-managed structure to share decision-making power and manage the firm’s projects.
What Is a Manager-Managed LLC?
Manager-managed LLCs are quite different from member-managed LLCs. There is a clear separation between the ownership and the management in a manager-managed LLC. The roles and responsibilities of the members in a manager-managed LLC are completely different from those of a member-managed LLC. In a manager-managed LLC, members appoint one or more managers to handle the daily operations of the business. Members usually act as passive investors while managers oversee the company’s functions.
When to Choose a Manager-Managed Structure
This management structure is preferred in various circumstances, such as when there are passive investors or members’ desire for professional management. This structure is also ideal for large and complex LLCs, which require professional help in the day-to-day processes of the company.
Advantages of Manager-Managed Structure
Some of the key advantages of manager-managed LLCs include scalability, attractiveness to investors, and smooth decision-making. It is easier to expand the operations of the LLC with dedicated managers. Furthermore, passive members can invest in the business without any management obligations. Decision-making can become streamlined with the help of professional managers.
Disadvantages of Manager-Managed Structure
However, LLCs managed by managers also have a few disadvantages. Hiring managers add salary expenses, which result in higher costs for the business. Members may not feel included in the day-to-day operations. Strong oversight is needed to ensure that managers work in the best interests of the members.
For example, a ten-member real estate investment LLC might appoint a professional property manager to oversee daily operations so that members can concentrate on growth and returns.
Key Differences Between Member-Managed vs. Manager-Managed LLCs
These differences have significant practical implications for business control, growth potential, and partner dynamics. While the setup is simple and costs are lower in a member-managed LLC, it offers limited scalability. On the other hand, costs are higher in a manager-managed LLC; there may be a higher potential for scalability. It is essential to choose the right structure based on the business model, complexity, size, growth ambitions, and partners’ goals.
Hybrid Management Models: Combining Member and Manager Roles for Flexibility and Efficiency
A large number of LLCs adopt a hybrid management model, which combines the flexibility and efficiency of a member-managed and manager-managed LLC. In such LLCs, both members and managers share operational duties and work for the benefit of the business. This kind of management structure can keep the members involved in critical business decisions and increase the efficiency of the company. However, a hybrid management model works well with a clear operating agreement that defines the roles and responsibilities of the members and managers. This reduces the possibility of conflict and increases the chances of business success.
How to Choose the Right Structure for Your Multi-Member LLC
Choosing the right structure is extremely crucial for the success of your multi-member LLC. Here are some of the key factors to consider when deciding between a member-managed vs manager-managed LLC.
- The number of members in the LLC is an important factor to consider when choosing the management structure. A member-managed structure might be practical for LLCs with fewer members, while LLCs with more members may choose the manager-managed model.
- The expertise and availability of members should also be taken into consideration when deciding on a management model. Members with skills and time can run the LLC themselves, while others can appoint managers.
- If there are passive investors in the LLC who want limited or no operational role, a manager-managed model might be the best.
- The size and complexity of the business also play a major role in determining the management structure. While larger and more complex ventures often benefit from professional managers, smaller and less complex ventures can work fine with members.
- The desire for professional management or collaborative owner involvement may also be a deciding factor for the right structure.
- The decision-making speed is a highly essential part of the decision. Member-managed LLCs allow faster and informal decisions, while decision-making in manager-managed LLCs is more formal, which takes time.
- State-specific legal requirements or default rules can also affect the management structure of the LLC.
Key Components of an LLC Operating Agreement
An operating agreement is extremely important for the smooth functioning of the LLC. This document is critical for the business regardless of the chosen structure. It should clearly define:
- Roles and responsibilities of members and/or managers.
- Decision-making processes and voting rights.
- Procedures for adding or removing members or managers.
- Conflict resolution mechanisms.
Communication and consensus among partners are of utmost importance. Partners are required to openly discuss goals, expectations, and management preferences before finalizing the structure. When all the involved parties are informed of all the decisions, the chances of misunderstandings later can be reduced significantly.
Although LLCs need to specify their initial management structure, many operating agreements allow for some flexibility in transitioning from a member-managed to a manager-managed structure (or vice versa) as the business evolves. LLCs are advised to consult legal or business professionals to avoid any legal consequences and comply with all regulatory requirements.
Which Management Style Fits Your Partners Best?
The choice between a member-managed and manager-managed LLC is a very strategic decision. Member-managed LLCs work best for small, closely involved groups, while manager-managed LLCs are suited for larger, more complex ventures with passive members. Partners are advised to evaluate their business model, growth plans, and member availability to pick the right management type for long-term success. Contact IncParadise today to start your LLC.
