The limited liability company (LLC) has garnered a lot of attention in recent years because of its flexibility and usefulness as a small business structure. Inc. notes that LLCs are a combination of partnerships and corporations and are quite popular among small enterprises. When setting up an LLC, one of the questions that need to be answered early on is how the company will be managed. The LLC offers two alternatives for this - the member-managed LLC and the manager-managed LLC. Each of these has its own distinct advantages and drawbacks.
The Member-Managed LLC
In a member-managed LLC, all the members partake in the decision-making process of the business. Each one of the members has a vote in each decision, as they are all considered agents of the LLC. The consensus to make these decisions comes from the vote. Some members may be exempt from voting if they choose to simply have their funds within the business and operate as non-voting members. If there is a tie in voting, the members should have previously outlined how the final decision would be made. Each member has the authority to make decisions on behalf of the company within their area of expertise. Contracts and loan agreements need to be made through consensus.
- The members closely interact with the business and have more experience with running the company
- There is less of a chance of a decision being made that the members would disagree with
- Each member has significant input in keeping with their interest in the business
- Can become convoluted in large corporations and business structures
- If members disagree often, it can be challenging to make any progress with the business's goals
- Overlapping skills and expertise can lead to ill-will between members of the business, potentially leading to the company's dissolution
The Manager-Managed LLC
A manager or managers are the primary decision-makers of the company, given their mandate and hired by the members. While a member-managed LLC is the default, a fair few structures opt for a manager-run enterprise instead. A manager might even be a member of the LLC, but that's not a requirement. All manager needs is to be appropriately qualified to run the business. The manager is the authority in many of the company's daily decisions, but the members retain a say over certain aspects of the business, such as is dissolution. The manager serves as the primary legal agent of the LLC and makes decisions on its behalf.
- In complex situations and large companies, manager-managed LLC benefit from having a single person coordinating the actions of the company and dealing with its decisions
- Businesses with investors may consider having a manager-managed structure since it allows them to remain as "silent partners" without needing to deal with the day-to-day running of the business.
- Manager-managed LLCs offer more privacy since the manager can be publicly stated in the company's filing while the members themselves remain anonymous
- Members don't have much of a say in daily decisions and rely on the manager to carry the company in a viable direction
- Members are divested of interest in the business and may not have any strong feelings about the business's decisions
The Core Difference Between the Structures
Member-managed LLC is the default setting for a company. Manager-managed LLCs offer an option for investor-based companies to have a registered manager there to deal with the needs of the business. The investors themselves need not concern themselves with the company's running and can remain behind the scenes with the tradeoff of not having a say in the company operation. Member-managed LLCs allow for more active and prominent members having a say in how their company operates and the direction it will take in the future. Each member in a member-run LLC has a voice based on their stake in the company.
Which Structure Is Best for You?
Each business has different needs, so it would be difficult to pinpoint a particular structure and say it works well for any business. If the company has investors or is a family concern, a manager-managed approach may be better. This diversification helps to decentralize the decision-making process from the members or investors and consolidate it in the manager. In businesses where the investor cadre can be large, manager-managed may be the best option. By having the manager making decisions, it can streamline the business's operation. In many industries, the ability to respond to market impacts and fluctuations quickly is of the utmost importance. Firms in these industries would do well to have their decision-making powers enshrined in a single manager rather than dozens of investors.
If the business is a small partnership formed with three or four members, then having a member-managed LLC would lead to a more suitable outcome. Many of these small business structures rely on the expertise of their members to drive the company's decisions. Having them take an active part in the company's decision-making process can actively influence the company's growth and development. Some industries require a lot of technical knowledge that members may have, but managers may not. In such a case, a conflict may arise between members and managers. No manager wants to feel as though a "backseat driver" member is controlling them, no matter how skillful the member is in the industry. Member management allows businesses to tap into their members' contacts, connections, and expertise to fix the company's problems.
Forming an LLC
If you're putting together a manager-managed LLC, you will need to spend time to figure out whether a manager is suitable for the position or not. Some businesses opt to hire a manager that has proven their competence in the field to run their company. Other companies opt to sign on a third-party company that operates their management processes and contracts the job out to an independent contractor. In either case, compensation should match the amount of effort they put into the position. Consulting a lawyer can help a business determine what type of management structure works best for them, as well as helping them draw up contracts for proper remuneration of hired managers.