Member Managed vs. Manager Managed Limited Liability Companies

Member-managed and Manager-managed LLCs

Limited Liability Company (“LLC”) operating agreements define an LLC’s management structure and detail the rights and responsibilities of members and managers (if applicable) LLCs commonly employ two different management structures: member-managed and manager-managed. Both member-managed and manager-managed LLCs have a different means of completing certain company tasks. In addition please note that a LLC is different than that of a general partnership or that of a corporation

In most states, unless the operating agreement provides otherwise, an LLC is deemed to be member-managed by default. Under most state law, a LLC must disclose in the Articles of Organization whether the management of the LLC is vested in a manager(s) or if the management of the LLC is reserved to the members. If the LLC is member-managed, the names and addresses of every member must be stated in the Articles of Organization.  If the LLC is manager-managed, the names and addresses of all managers and members who own twenty percent (20%) or more of the LLC must be stated in the Articles of Organization.

Members of a member-managed LLC are responsible for the daily operations of a business. Unlike corporations and manager-managed LLCs, member-managed LLCs do not have officers or boards of directors. However, members in a member-managed LLC may hold offices such as secretary, treasurer, and vice president and can have certain responsibilities as are set forth in the operating agreement. Most state laws do not restrict the titles an LLC may give to its employees or personnel. Member-managed LLCs only need to have one member listed in the articles of organization filed with their state government, and they tend to only require a single-level structure. As a result of only a single-level management structure, member-managed LLCs tend to cost less to operate.

Each member in a member-managed LLC is considered an agent of the LLC for business purposes, and any act committed by a member will bind the LLC unless the member had no authority to act in a particular matter and the person or entity with whom the member dealt with was aware of that fact. Unlike corporations, wherein the majority of stock ownership can make major decisions, LLCs must state how their members distribute voting rights. LLC operating agreements commonly specify one of two forms of member voting rights. For instance, one form often used by manager-managed LLCs permits voting power to reside in relation to the member ownership percentage. With this setting, a member owning 35 percent (35%) of the LLC has more votes than a member owning 5 percent (5%) of the LLC. A second common option often used in member-managed LLCs grants each member, regardless of ownership percentage, one vote.

Generally, if a member-managed LLC does not have an operating agreement, each member will have one vote for decision-making matters. Member-managed LLCs without an operating agreement are very similar to partnerships regarding decision-making, with most business decisions made by a majority vote of the members. For example, if an LLC has two members and no operating agreement, both members would always have to agree on every decision because otherwise there would not be a majority. Failing to explicitly delineate members’ roles in an LLC’s operating agreement can result in giving undesired control to certain members or subjecting some members to undesired liability.

Member-managed and Manager-managed LLCs each have their own advantages and disadvantages. Truly when choosing between a member-managed and manager-managed LLC members must understand such advantages and disadvantages along with their companies needs and future goals. Members should consider the role they plan to play in future company operations. If members of an LLC intend to make and sell products, provide services, or work with consumers directly, a member-managed organization would be most suitable. If all members within an LLC will have substantial input or participation in the management of the company, then a member-managed LLC is the most appropriate.