By Members or Managers?
If you’re starting a new limited liability company (LLC), you’ll need to decide if you want your company to be managed by its members, or a designated manager. There are objective pros and cons to each option, and depending on your LLC’s unique characteristics, one or the other will align more closer with your goals.
When a limited liability company is managed by its members, the LLC’s ownership group collectively runs the company. For a single-member LLC, the sole owner manages the company themselves. With multi-member LLCs, all of the owners share equal managerial responsibilities.
For reference, all new limited liability companies are automatically classified as member-managed unless specified otherwise. This is because this form of management is more common than naming a manager, which requires a separate designation.
Most small businesses are relatively simple operations that generally don’t require a separate managerial structure to operate smoothly. Member management is also a good choice for businesses with members that want to be involved in the ongoing daily activities of the company.
If you have a relatively small ownership group that works well together, and prefers to be directly involved in hiring employees, overseeing the sale and transfer of your goods and/or services, and other business functions, management by your members is probably the way to go.
Some LLCs choose to designate a manager or management team to handle the management of their LLC. This can be someone outside the company, or it can be an existing member or members.
If you choose to designate a manager from within your company, this will have no effect on ownership shares. It is simply a matter of who handles the day-to-day managerial tasks in the business.
There are some common reasons that LLCs choose to be managed by a specified manager, chief among them being that not all LLC members are interested in a managerial role. Designating a manager can also be a good idea for LLCs with large ownership groups.
Sharing management responsibilities among all members can be impractical, inefficient, and lead to unnecessary confusion or even infighting and conflict within your business. The perception of too many cooks can also be a turnoff to potential investors, making a manager-managed LLC a safer bet for those looking to bring in additional partners.
Another common reason for designating a manager for your LLC is if you run a family business. Often, when a family-owned LLC is passed down from one generation to the next, a designated manager may be put in place to shield the incoming generation of owners from full responsibility right off the bat.
If you choose to be a manager-managed LLC, you’ll need to make a record of that decision. In most states, you can do this in your articles of organization, and perhaps also in your operating agreement. In this document, you should also outline what responsibilities the manager has and what power they have to fulfill them.
For many limited liability companies, the decision between management by members and management by managers is fairly simple. Still, there are some LLCs that can have a harder time figuring out which form of management works best for their unique needs.
One good thing about this decision is that you can always change your mind later, as long as you remember to make the corresponding change with your state of formation. This can usually be done in your annual report.