Businesses don’t run themselves; someone needs to be at the helm. For LLCs, there are generally two ways to manage the business: (1) by the individual members, or (2) by an appointed manager (or managers).
Member-Managed LLCs An LLC consists of members, similar to shareholders in a corporation. In a member-managed LLC, the members handle the day-to-day operations. This means all members likely have a say in how the business is run. Therefore, it's crucial to consider the authority each member holds. If you know a partner or member is unreliable in a certain aspect of the business, it might be wise to limit their authority in that area. For example, if one partner is poor with financial management, you may want to specify in the operating agreement that another member controls the company’s bank account. Additionally, it's important to define who can sign on behalf of the company and bind the business. Clearly delegating roles in your operating agreement is beneficial even when all partners are competent because it sets clear expectations. When people know their roles, they are more likely to succeed—they understand what's expected of them, have the autonomy to perform their duties, and aren't stepping on each other's toes. Member-managed LLCs are ideal for small startups where all members are actively involved. However, as your organization grows, this structure may create friction and bottlenecks. Running daily decisions by 30 individuals, for instance, can slow down operations. In such cases, a manager-managed LLC might be more appropriate.
Manager-Managed LLCs In a manager-managed LLC, the members appoint one or more individuals to handle daily operations. The manager functions like a president and chief board member combined. This setup is ideal when members prefer not to be actively involved in the business. Interestingly, the manager doesn’t need to be a natural person—it can be another company or trust. One benefit of having a company as your manager is the added privacy. In many states, the manager of an LLC is public information. By appointing another company as the manager, it becomes more challenging for outsiders to identify who operates your business. However, keep in mind that with a manager-managed LLC, where members are passive, regulators might consider your equity issuances as sales of securities. Therefore, it’s prudent to seek legal counsel familiar with securities regulations to navigate this aspect.
Conclusion
Choosing the right management structure for your LLC is crucial to its success. Whether you opt for a member-managed or manager-managed approach, understanding the implications of each is essential. At the Law Office of Langston A. Tolbert P.C., we specialize in advising entrepreneurs with entity formation, company restructurings, venture finance, debt finance, and M&A.
If you need guidance on structuring your LLC or have any other legal questions, don’t hesitate to reach out. Contact the Law Office of Langston A. Tolbert P.C. today to schedule a consultation and ensure your LLC is set up for success.
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