Choosing to start an LLC means you have a critical decision to make: deciding the management structure.
Member-managed LLCs give owners collective control over company decisions. On the other hand, manager-managed LLCs hand over the management authority of a professional manager or one or more elected members.
This guide will outline the basics of members vs. managers in an LLC and discuss a few tools and tricks to forming an LLC without errors.
Understanding the LLC Business Structure
Before diving into the members vs. managers debate, you should understand the concept of an LLC.
An LLC is a type of business structure that’s easy to create and involves less paperwork when compared to a corporation. It also offers personal liability protection to owners, meaning they cannot be held accountable for the company’s debts and obligations.
This business entity can have one owner (a single-member LLC) or multiple owners. When you’re the sole owner, you don’t need to decide between member management and manager management since you’ll be in charge of all management decisions by default.
When an LLC has more investors or multiple owners, things get complicated.
In this case, either all the members can collectively manage the LLC or elect a non-member or outsider as a manager. Alternatively, the owners can decide to use a combination of members and non-members to run the business.
The one in charge of management and make the following types of decisions on behalf of the company:
- Find agreement and enter into contracts
- Buy and sell business assets, real estate, equipment, and so on
- Hire employees and other staff members
- Open, manage, and close business bank accounts
- Apply for business loans
You need the right person for the job to ensure the LLC’s long-term success. You can decide between member-management and manager-management when filing for your LLC’s Articles of Organization with the state.
The Basics of Members vs. Managers in an LLC
Let’s deep dive into the basics, where we cover the good and the bad of each LLC management style. Let’s take a quick look.
Member vs. Manager Definition
Both the LLC member and the LLC manager are the primary decision-makers of the company, but their extent of power changes under each management style.
An LLC member is the actual owner of the LLC. This person has made a capital contribution of some kind—startup funds, services, or physical assets—to secure a stake in the business.
As such, they will always have an interest in the business, regardless of their role. This gives members the right to a portion of the business’s profit, voting rights, and other rights outlined in the company’s operating agreement.
On the other hand, an LLC manager can be an individual, group, or entity that manages the day-to-day company operations.
Members can also decide whether they want the managers to be current members of the LLC or a third party. Third-party managers can either be individuals or other business entities like a corporation or another LLC.
Ultimately, it all boils down to whether LLC members want to take on an active role in regular business operations or hire a manager or managers to handle day-to-day responsibilities.
Member vs. Manager Management Styles
A member-managed LLC involves the active participation of all members during the decision-making process. Every member is treated as an agent of the LLC, which also gives them a vote in business decisions. Since decisions have to be made by consensus, members must agree on how to break a tie. Tie-breaking will be outlined in the Articles of Organization.
While every member has the authority to make decisions on behalf of the LLC in their area of expertise, a majority approval is required to enter into contracts and loan agreements.
The authority of the members discussed above is handed over to a manager or managers under the manager-managed LLC. In other words, the managers become the agents of the company.
As mentioned, LLC members can become managers. When electing another LLC or the corporation as the manager, owners must confirm whether the state allows entities to become managers of an LLC.
Member-managed is the default choice in most states when no manager is elected. However, to assume manager management, the members must choose managers and designate them in the LLC’s operating agreement.
Management Structure Selection Factors
Deciding between members and managers for your LLC is a crucial decision that depends on certain factors. To make it easier for you, I’ve listed the reasons you should choose a member-managed LLC and a manager-managed LLC.
Reasons to select a member-managed LLC:
- When members (owners/stakeholders) want to play an active role in the day-to-day management of the company
- When an LLC has a small number of members and can easily handle basic decision-making without the involvement of other members
- When the members are familiar with the business and have the experience and expertise to make well-informed decisions
Reasons to select a manager-managed LLC:
- When LLC members don’t want to take part in decision-making and are ready to give up their vote regarding ordinary business decisions
- When LLC members are ready to elect third-party individuals from outside the organization
- When the company is very large and operates in multiple states, making it difficult to get all members together to make decisions
- When members want to be passive investors, they lack management experience, or aren’t familiar with the business
Pros and Cons
Members and managers in an LLC have crucial differences—each with its own set of pros and cons. Since your choice will directly impact your daily business decision-making, you should be aware of these effects in detail.
Selecting manager-managed LLC makes it easier for investors to invest passively and centralizes the decision-making authority. It also allows managers with active control to make quick decisions without the consensus of all owners.
In exchange, the owners of a manager-managed LLC have to let go of their right to participate in management decisions. Also, as the authority to make decisions will lie directly with the manager, the LLC’s success will largely depend on their expertise and skillsets.
Hiring a professional manager may be harder for small companies as the company will have to give a fixed salary.
Member-managed LLCs give members an active say in management matters and have a far less complicated structure, which works well for small companies. However, managing an LLC is a full-time job that may take away from the owners’ time, which could be spent on more strategic decisions.
Moreover, member-managed LLCs find it harder to raise money from investors.
Manager Compensation
If you opt for a member-managed LLC, you have to figure out the compensation. Naturally, the amount receivable will be different for a member manager as opposed to a non-member manager.
If the LLC hires a professional manager or a non-member manager, that person will be treated as a company employee. As such, they will be liable to receive a reasonable salary, and payroll taxes will be withheld from their pay. There should also be an active employment agreement between the non-member manager and the company that clearly outlines their duties, pay, and benefits.
Contrarily, a member manager will get two types of payments, considering they will wear two hats.
First, the member manager will get their portion from the LLC’s earnings based on their ownership and percentage. Second, the member will also receive his pay as the manager, which will be the usual amount paid to an employee, and payroll taxes are withheld from their pay.
3 Tools to Improve LLC Formation
Starting an LLC can be challenging, especially if you don’t have the right guidance. Luckily, many amazing LLC services offer reliable and cost-effective ways to form an LLC.
Below is a list of the three best services that tick off all the right boxes when it comes to affordability and performance. These services can also help you choose between member-managed and manager-managed LLC management structures.
Check out our guide to the top seven LLC services for more information on these and several others.
Rocket Lawyer
Rocket Lawyer is an LLC formation company that offers a wide range of legal services, ranging from starting your LLC to managing the company post-launch.
This LLC service has a subscription-based model that gives members access to many excellent features, such as free incorporation service, free legal documents and document defense, exclusive discounts on registered agent services, and more.
You also get no holds barred access to legal documents, ongoing support from professional lawyers, and more. I recommend going for Rocket Lawyer if you want ongoing legal services beyond the initial LLC creation.
There’s also a 100% satisfaction guarantee, so if you’re unhappy for any reason, you can get your money back within 30 days.
IncFile
IncFile can be life-saving for entrepreneurs on a budget.
Their LLC formation services start as low as zero dollars, where you only have to pay the state fees. Easy to see why over 500,000 businesses have used their services to kickstart their entrepreneurial dreams.
IncFile subscription plans include LLC documentation preparation and filing, next-day processing, online order tracking, and round-the-clock customer support. You’re also assured of free registered agent services and unlimited name availability searches within the first year.
That said, you may find yourself dealing with more upsells and potentially higher overall prices because of this. So make sure you’re careful with the plans you purchase if you don’t want to go overboard with your budget.
ZenBusiness
If you’re looking for a straightforward way to start your LLC, don’t look further than ZenBusiness.
This LLC service offers high-quality and affordable packages tailor-made for entrepreneurs that cover all the necessities when starting an LLC.
Their Starter package includes LLC formation, plus 12 months free registered agent service, a Worry-Free accounting assessment, and a customizable operating agreement template. Although an EIN isn’t included with this plan, you can always purchase it as an add-on or get one yourself from the IRS for free.
ZenBusiness also enjoys excellent online customer feedback. There are over 6,200 reviews online, and nearly all of them are positive.
3 Tricks to Running a Successful and Compliant LLC
Once you decide your management structure and form your LLC, you have to practice some best practices to ensure your company stays compliant and practices good governance. Here are a few of them:
Follow the Operating Agreement
The whole idea behind creating the operating agreement is to outline how you plan on operating after starting your LLC.
The document is essentially a well-drafted written record of owner expectations in terms of ownership, LLC structure, business, and operations. If any dispute arises between an LLC and a third party or between members, it can come in handy by serving as evidence.
Keep Member and LLC Assets Separately
You must separate member and LLC assets if you want to retain your personal liability protection. Otherwise, the IRS may end up taking away the liberty.
Document all distributions and advancement to members and any loans to the LLC and their repayment terms. Any later contribution made after a capital call should be carefully documented as such.
Practice Accurate Record Keeping
Record-keeping is a vital process of any company, and an LLC is no exception.
Here, you must ensure every critical business decision is carefully recorded, with members having access to the records as required by the LLC operating agreement. The list of members and their ownership interests should also be up-to-date, well organized, and stored in a fireproof and secure location.
What to Do Next
After deciding between member vs. manager management debate, focus on fulfilling the other processes involved in starting an LLC.
You’ll have to create a well-drafted LLC operating agreement, file the necessary documents and reports for taxation, and finally get your company registered for the final takeoff.
Check out the following Quick Sprout guides to understand the next steps and set yourself up for success:
Source: quicksprout
The Beginner’s Guide to Members Vs. Managers in an LLC