Member-Managed LLC

Before forming a limited liability company (LLC), it’s important to decide on your company’s management structure — for which you have two options: member-managed or manager-managed.

In this article, we’ll explore the member-managed option for LLCs, explaining what it is, why it can be advantageous, and how it differs from a manager-managed LLC.

What is a Member Managed LLC

In an LLC, the owners may also be referred to as “members”. In a member-managed LLC, these members are the ones who are actively responsible for running the day-to-day operations of the company.

This management structure is ideal for LLCs with only a small number of actively engaged owners or investors who want to hold direct responsibility for the business’s operations. Given its simplicity and the level of control it provides to the LLC owners/members, it’s a common choice among many LLC owners.

States require LLCs to specify their management structure in their Articles of Organization (also known as a Certificate of Formation or a Certificate of Organization). Remember that in most states, the member-managed option is actually the default LLC structure designation.

If you didn’t indicate a management structure in your LLC’s Articles of Organization or Operating Agreement, all members may be considered LLC managers.

Advantages of a Member Managed LLC

Many people forming an LLC choose to be member-managed for the following reasons:

• Suitable for Small Companies: This is a great option for LLC where the number of members is relatively small as it allows them all to participate in the management of the company. As a member-managed LLC, you’ll also get greater flexibility in how you structure your business
• Simple Management Structure: This is a less complicated management structure as all members of the LLC participate in the decision-making process for the business. This LLC structure is referred to as “decentralized management” because the administrative power is spread out among the members rather than centralized in the hands of one or more managers
• All Members Have Voting Rights: In a member-managed LLC, each member owns a percentage of the company and therefore each receives a vote on important business decisions. Each member holds the authority to make decisions on behalf of the company. However, a majority of the members must agree upon business contracts and other transactions

However, attracting investors tends to be more difficult for member managed LLCs. This is because most investors act as passive investors or “silent partners” and don’t often want to be involved in managing the business and its daily operations.

This can make it a little bit more tricky to raise money from investors with this management structure.

Are LLC Members Employees?

As an LLC member, you’re not considered an employee. LLC members or owners receive distributions from the company’s profits, but they’re not employees. Professional managers, on the other hand, are considered employees and do receive a salary for their work.

Although LLC members don’t receive any salaries, they hold the right to share in allocations of the profits and losses of the business. Members also have the right to share in distributions of the LLC’s assets during its existence and when it dissolves and liquidates.

Whether shared equally or based on capital contributions or some other criteria, how an LLC’s members will receive these financial distributions should be outlined in the LLC Operating Agreement.

Member Managed vs Manager Managed LLC

In contrast, manager-managed LLCs are run by a select few managers who’ve been appointed to take control of the running of the business on a more day-to-day basis, with members reserving their power to vote on key company decisions.

While member-managed LLCs are far more common, there are still certain situations in which selecting a manager-managed structure is advantageous. When deciding between the two types of LLC management structures, you should weigh several factors to determine the best fit, including:

• Company Size: While smaller LLCs will generally prefer a member management structure, the opposite is also true for larger companies with a manager-managed structure. This is because the bigger a company becomes, the more impractical it is for all members to vote on every decision — instead, a smaller group of managers can make much quicker decisions
• Anonymity: If privacy is important to you or any of your associates, you’ll likely prefer to form a manager management structure as only the names of the managers need to be listed in public records, meaning all other members’ identities can remain private
• Ownership Style: If you, or any of your associates, would prefer not to be actively involved in the running of your LLC, a manager-managed LLC would be far better suited to your needs as it would allow you to elect a small group of managing members to handle this responsibility on your behalf

We discuss this topic in greater detail in our Member Managed vs Manager Managed LLC if you’re interested in reading more.