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Should My LLC be Member-Managed or Manager-managed?

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Question: Should My LLC be Member-Managed or Manager-managed?
Answer:

Background
An LLC is a limited liability company whose owners are called "members." An LLC may be composed of one or more members. Like every company, an LLC must have one or more individuals who manage the company, acting like the board of directors does in a corporation. An LLC may be managed by all of the members or the LLC may decide to hire a professional manager. No state law requires an LLC to be member-managed. But which type of manager is better?

Member-managed LLCs work like this: All members participate in the decision-making process of the LLC. Each member is an agent of the LLC and each member has a vote in business decisions...." (LLRX) Each member has the authority to make decisions on behalf of the company, but contracts and loan agreements must be approved by a majority of the members.

Manager-managed LLCs relinquish the authority of the members to the manager or managers, who become agents of the company. A manager may be a member but does not have to be. A manager may be another LLC or a corporation, unless your state sets restrictions on the types of entities that may be managers of an LLC.

Most LLCs are member-managed by default in most states. That is, no manager is selected and member management is assumed. In most states, manager management must be designated in the Operating Agreement.

Reasons to Select Manager-Management
LLCs often choose a manager in two cases:

  1. Passive Members
    In some LLCs, members can be passive. These individuals may be investors and designated as members, but they do not participate in the day-to-day decision making of the company. In this case, it makes sense to have a manager or several managers (remember a manager can also be a member) to run the business.
  2. Size of the LLC
    In very large LLCs, it also makes sense to select one or more managers to run the company, since it would be prohibitive to try to get all the members together to make decisions. The members can then focus on their expertise and the work they want to do.

It's important to remember that if your LLC selects a manager, the manager has the authority to make decisions for the LLC. If you don't want someone else deciding, then the members can retain that right.

Selecting Member-Management vs. Manager-Management
The time to determine who will manage your LLC is before you begin operations. The operating agreement should specify who will manage and how decisions will be made. Don't leave this important question for later or you may find yourself in legal difficulties.

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Disclaimer This article is intended to provide general information, not legal advice. Every business situation is different and you should discuss decisions about how your business will be managed with your legal advisor.

Attorney Susan Dawson on Member-managed vs. Manager-managed LLC's
I have one rule with LLCs: Never be member-managed unless there’s a clear, distinct reason for it. Why? Because in most states, if you are member-managed you have to list the names and addresses of all the members on the organization documents. Why would you give the general public the names of the owners of your company if you can avoid it? There is no reason why the members cannot also be “managers”. With a manager-managed LLC, you list the names and addresses of the managers – not the members. That means you are telling the general public who runs the company – not who owns it (aka who has the $$).

Member-managed may be acceptable or appropriate where the member is an entity that shelters the names of its owners (that is, a manager-managed LLC or a corporation).

Manager-managed LLC's have one main disadvantage. In most states, a manager of a manager-managed LLC has more fiduciary obligations to the LLC and the members than the members do. So if you have a company where everyone is actively involved in running the business, you either need to list all the members as managers or you have to adjust the operating agreement so that all members have the same fiduciary obligations as the managers. For example, many states would allow a member of a manager-managed LLC to compete with the LLC, but a manager cannot. So by being the only manager, you have essentially bound yourself to a non-compete arrangement when your fellow members (who are not managers) have not. The only way around this result is a good operating agreement.

Susan Dawson, partner with Waltz, Palmer and Dawson LLC , has devoted her career to representing businesses, business owners, and entrepreneurs. She concentrates her practice in the areas of Business/Corporate Law, Employment Law and Commercial Real Estate/Leasing. Waltz, Palmer Dawson LLC was founded in 2008, creating one of the only entirely women owned law firms in the Chicagoland area.

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