When you form your new Limited Liability Company (LLC), you need to choose your LLC management structure.
You can choose between two possible LLC management structures, a member-managed LLC or a manager-managed LLC.
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Both member-managed and manager-managed LLCs can work for your new business, but it is important to consider your company size and needs before deciding.
Member-Managed LLCs
In a member-managed LLC, all the members (owners) participate in running the business. For the majority of small businesses, a member -managed LLC is the best choice for the following two reasons:
- LLCs have simple, streamlined organizational structure where owners want to be directly involved in day-to-day operations and make all the decisions on behalf of their company.
- Most LLCs are small businesses and may have limited resources when they start their business. LLC owners try to avoid unnecessary costs that come with outside management.
Also, if an LLC member performs management functions, he or she can be compensated for his or her work as an employee.
Manager-Managed LLCs
In a manager-managed LLC, only designated members, outsiders or a combination of members and nonmembers are given the responsibility to run the business.
The other members in a manager-managed LLC are considered to be passive investors who are not involved in business operations. A manager-managed structure may be preferable in the following situations:
- When your business or ownership is too large, or complex to efficiently allow sharing management responsibility among all members.
In this case, the LLC should probably grant management duties to an outside management firm or to a designated LLC member. - When members are not skilled at management or are not familiar with a particular industry to run day to day operations.
In this case, delegating management to another person, group of people or organization can be an effective way of running the business and ensure more competent management of the business. - When the business is a family business.
Using this business structure, parents can bring children into the business as passive members without giving up control of company operations to them. Doing this allows families to grow their wealth without requiring children to be involved in the management of the company.
The tasks and responsibilities of a manager include the ability to enter into contracts on the LLC’s behalf and participate in business decisions, as well as open and close bank accounts and make legal and financial decisions.
If your LLC decides to hire a professional manager, that person is an employee of your company and you should pay that person a reasonable salary. Make sure to withhold payroll taxes.
If you choose the manager-management structure for your LLC, you need to state so in your LLC formation documents.
You should always specify manager roles and responsibilities in your LLC operating agreement. If you fail to do so, you may be stuck with the state’s default LLC rules, which might not be favorable.
