When you establish an LLC, you must plan for its management. LLCs may divide decision-making powers among members or select a manager. If your LLC is single-member, you assume managerial powers, but multi-member LLCs must decide. To make the best choice, check out our breakdown of member-managed LLCs, manager-managed LLCs, their differences, and how to address concerns around manager-managed LLCs.
Member-Managed LLCs vs. Manager-Managed LLCs: The Key Differences
Every LLC must decide between a member-managed or manager-managed structure. A member-managed LLC is the norm. These function like democracies, as power is equitably divided among the members. A manager-managed LLC, however, designates one person for managerial powers. Manager-management can help particularly large companies make decisions.
Whether the manager’s a “professional” or picked from the LLC’s members, the critical thing to know is that they have power over the entire LLC. Consider these company-wide powers delegated to managers:
- Ability to enter the LLC into contracts
- Hiring and firing powers over LLC employees
- Authority to conduct daily business, including handling debts, writing checks for employees, and more
- Borrowing or investing company funds
- Buying and selling company assets
If you’re appointing a manager, read your LLC’s paperwork carefully before signing to ensure power is limited and manager responsibilities are clear. Even LLCs using managers don’t surrender these member powers:
- Replacing the manager
- Amending the operating agreement
- Selling or dissolving the business
- Other “major business decisions” defined by state law
Managers of LLCs must meet more compliance criteria than members. Managers have to play by both the rules of the company and the law.
Making the Choice: Does Your LLC Need a Manager?
The manager holds a specific legal role. You may select a “professional” manager, as some multi-member LLCs do, or select a manager from among your members. But here are the key issues to be aware of should you choose this route:
- Authority issues. Managers in these types of LLC hold a great deal of authority, often disproportionate to members.
- Daily Operations. A perk of using a manager is having a designated person to handle day-to-day operations: collecting payments, hiring contractors/employees, paying debts and taxes, etc. If you can perform these duties, you may consider volunteering to manage if your LLC collectively prefers a manager structure.
- Asset concerns. The ability of managers to buy and sell major assets may prove problematic for real estate investing.
The good news is this: for every concern you have, there are ways to address it.
Using a Manager-Managed LLC: Tips for Mitigating Risks
A beautiful thing about the LLC is you have choices. Once you’ve made decisions, they’ll be in plain black-and-white ink for anyone to read in the form of your Operating Agreement. This is your LLC’s Bible.
For instance, some of the concerns about abuse of power are easily prevented by addressing these possibilities and creating checks (like requiring a member vote) in your Operating Agreement. You may choose to make amending the Operating Agreement more difficult or bar managers from making certain calls without member consent. In fact, any matter you’d like member consent on can be accounted for before LLC formation.
The best way to control for problems is in your Operating Agreement prior to forming your LLC. Of course, LLC members truly worried about hierarchy can side-step the entire issue easily by simply forming a member-managed LLC.