LLC Management Structuring
LLCs have two different possible management structures. The first is member-managed and the second is manager-managed. What the LLC does and its size will help determine which management structure will work best for your situation. It is important to decide which kind of management your LLC will use prior to the LLC starting business operations. It is helpful to designate which kind of management the LLC will be using in the operating agreement when the LLC is being formed. Doing so will prevent issues and disagreements later on about everyone’s roles in the business. Some states may automatically default LLCs as member-managed so if you don’t want yours to be member-managed then it is even more important to make sure you designate how it will be managed in the operating agreement.
Since LLCs are usually smaller businesses, formed by those who want to run it, member-management is often the more popular of the two management methods. It is also the simplest. Under this method, and as the name suggests, the members (meaning anyone who owns an interest in the LLC) are the managers. It is a single layer management system. There isn’t a board of directors or officers and there is not a another level for managers, thus making them less costly to operate. All the members are directly involved running the business and making all the day-to-day decisions. Everyone has an active role and ensures that all members have input. All members have the authority to bind the business to an agreement, though certain members may be designated to sign legal contracts. A member that has this authority to enter into contracts, hire and fire employees and make day to day decisions on the part of the LLC is called a managing member. Managing members have the possibility of having exposure to personal liability that the LLC protection doesn’t extend to because of their involvement in the everyday operations of the LLC. For there to be a possible exposure of personal liability, the acts of the managing member generally have to negligent or intentional.
Another consideration for managing members is potentially having to paying self-employment tax. Those members that aren’t involved in the management most likely will not have to pay self-employment tax. It is best to discuss tax implications with your accountant or tax advisor to ensure that all the members are aware of their roles and how it may impact taxation on a personal level.
It should be noted that even with managing members being able to have legal authority to bind the LLC, in small LLCs agreements may still need to be reviewed by and agreed on by all members as they all are equal partners with equal say. This is not practical with larger LLCs as it doesn’t make sense to have that many people to be involved in the day to day operations and decision making.
The kinds of businesses that the member-manager structure works best for are those where all members will work directly with customers in one way or another, like retail shops, or restaurants. It’s easy to see how all the members in these kinds of businesses would each have some kind of direct contact with customers and therefore will want to be involved in all business decisions and operations.
Larger LLCs work best under the manager-managed structure. When the LLC has hundreds of members, there is no way that all of the members can be part of the management of the business and decision making by all of them would not be efficient or reasonable.
Members may just want to be passive investors and may not even want any part of the decision-making or operating of the business. While non-manager members may not have a say in the running of a manager-managed LLC, they will certainly have a right in the LLC’s profits. However, they may not have to pay self-employment taxes, since they are not an active member.
In manager-managed LLCs, the members can choose a small group of members, or even non-members, to take on these tasks. Managers that aren’t members are chosen when members do not have the necessary business expertise necessary to run the daily operations of the business. The people chosen to manage will have the skills and experience that the members may not have. It may also allow members to take on different tasks, such as growing the business or concentrating on other areas where they may have the expertise. This will help run a larger LLC run efficiently, as those that have been tasked to manager will have the knowledge and expertise that other members may not have.
The other kind of LLC that might benefit from this kind of management structure are family businesses. Children can be made members of the LLC without having any kind of decision making or management responsibilities, but can still take part in the profits of the LLC.
Flexibility With Operations and Ownership
LLCs provide a lot of flexibility with how they can be managed. LLCs can choose to either by member managed or have separate managers. With member management, the members of the LLC all of the right to have a say in the day to day management of the business (such as entering into contracts) regardless of their percentage of ownership.
Separate managers can also be appointed, allowing people who have no membership interest to manage the day to day operations. Whichever way works for your LLC, the choice is up to you!