In a manager-managed LLC, all members maintain voting rights and can maintain general control proportional to their share, while limiting their responsibilities for the day-to-day activities carried out by the manager-managed LLC. Manager-managed LLCs require a clear manager-managed LLC operating agreement to function smoothly. This operating agreement not only establishes who the managers are and what responsibilities and fiduciary duties they share, but it also reiterates the control reserved for members. Without a stable, well-written manager-managed LLC operating agreement, there are often unintended consequences for members, both legally and financially. An experienced incorporation lawyer from the Priori network can help you set up a manager-managed LLC operating agreement for your manager-managed LLC that will balance the needs of the members and managers without leaving any detail unclear.
What Is a Manager-Managed LLC?
A manager-managed LLC is a limited liability non-corporate business entity owned by shareholders called members but run by specific managers as detailed in the manager-managed LLC operating agreement. A single member of an LLC may be selected to act as the manager of the company or a management team may be appointed. In many cases, some or all of the managers are not members; instead, they may be outside staff appointed by the members. Key decisions for the company are still deferred to a member vote, but all regular business decisions and operations are carried out by managers who have a fiduciary duty to the members.
Advantages of Manager-Managed LLCs
There are three main advantages of manager-managed LLCs that can’t be as easily accomplished in member-managed LLCs.
- Streamlined Decision-Making. When an LLC structure and its membership is too large, too diverse, or too complex to act quickly to changing business realities, manager-managed LLCs offer a way to streamline the decision-making process. Members only need to be consulted for major votes. Regular business is carried out by a management team of managers who act on members' behalf.
- Passive Membership. Sometimes, not all members investing in an LLC want to be involved in the business. In these cases, such members serve a passive role made possible by managers.
- Member Anonymity. All members of a member-managed LLC must be made a part of the public record when the LLC is incorporated. If you incorporate as a manager-managed LLC, however, only managers must be listed in the public filings. Having a manager-managed LLC makes it possible for certain investors to keep their identity more anonymous.
Disadvantages of Manager-Managed LLCs
While all LLCs have the potential to be complex, it is almost inevitable that manager-managed LLCs are complicated. Because they have less statutory regulation, manager-managed LLCs must be more thoroughly self-regulated using a complex operating agreement. Unlike member-managed LLCs, it is easy to get mired in details of control which can be tedious to establish without the help of an experienced lawyer. This added complexity can make manager-managed LLCs even less attractive to investors, as their rights will be less clear. Furthermore, going public is notoriously tricky for manager-managed LLCs, so most businesses looking towards an eventual public offering instead incorporate as a C-Corp.
The Role of the Manager-Managed LLC Operating Agreements
The manager-managed LLC operating agreement is vital to the operations and management of a manager-managed LLC. Because it establishes the unique roles and responsibilities of the managers and the members, a manager-managed LLC operating agreement serves to define not only the type of management structure to be used, but also what level of control and decision-making abilities each role maintains. Failure to differentiate between these roles and their relationships will mean that state law applies. This can open your LLC to unexpected liabilities or give unintended control to non-members (or the wrong members). For this reason, a manager-managed LLC cannot function without a well-executed manager-managed LLC operating agreement.
Depending on the complexity of your governance structure, plans for investment and growth, and number of owners, the cost of having a manager-managed LLC operating agreement drafted can vary. When you hire a lawyer in the Priori network, forming your LLC and drafting an operating agreement typically costs anywhere from $350 to $5,000. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
What’s the Difference Between Manager-Managed LLCs and Member-Managed LLCs?
While similar, member-managed LLCs do not differentiate between management and membership. That is, all members of a member-managed LLC have the ability and responsibility to carry out daily operations of the company. Although some member-managed LLCs do give certain responsibilities to single members, any member can carry out official business on behalf of the company, while in manager-managed LLCs, that power is concentrated among the managers.