An LLC combines the tax benefits of a partnership or sole proprietorship with the limited liability of a corporation. An LLC also offers substantial operational flexibility in terms of management structure. One of the key decisions you'll need to make is whether the members or owners of the LLC will be responsible for the day-to-day operation of the business or whether you will retain non-owner managers to manage the business. If you elect the former course, your LLC will be a member-managed LLC.
While simpler than most manager-managed LLCs, member-managed LLCs still require a clear member-managed LLC operating agreement or there may be unintended legal and financial consequences for members. Discuss your concerns with an experienced Priori incorporation lawyer who can help you form the member-managed LLC that will fit with the way you operate best.
What Is a Member-Managed LLC?
A member-managed LLC is the default type of LLC in most states, and they are the more common type of LLC. A member-managed LLC is a limited liability non-corporate business entity operated by the members in concert on a day-to-day basis. In this format, all owners have a voice proportional to their share—unless otherwise determined in the member-managed LLC operating agreement. All members share responsibilities for management, or these responsibilities are appointed to certain officers, but important decisions must be made by a majority vote. A member-managed LLC can have as few as one single member in order to get started.
Advantages & Disadvantages of Member-Managed LLCs
One advantage of member-managed LLCs is that they are simpler to set up than manager-managed LLCs, and they ensure that each member can carry out business without limitations. Each key member has control and input about the daily operations of the LLC. On the other hand, member-managed LLCs can quickly become unwieldy. If there are many members, it can become difficult to keep track of what is happening in the business and keep all financial and legal commitments straight.
Member-Managed LLC Operating Agreements
Member-managed LLC operating agreements play an important role in defining what issues the members will vote on and which votes require unanimity. More importantly, the member-managed LLC operating agreement is often used to determine who is responsible for which tasks, establishing structure within the company. Without defining these roles, member-managed LLCs with more than just a few members often fail.
Depending on the number of members in your member-managed LLC and your plans for investment and growth, the cost of having a member-managed LLC operating agreement drafted and forming your member-managed LLC can vary significantly. When you hire a lawyer in the Priori network, forming your member-managed LLC and drafting an operating agreement typically costs anywhere from $350-$1000 for a single-member LLC and from $750-$5000 for a multi-member LLC. 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 is the difference between member-managed LLCs and manager-managed LLCs?
While similar, manager-managed LLCs limit the responsibilities of running the business to certain members or even managers appointed from outside. Unlike in member-managed LLCs, this means that members can take a passive role without neglecting their fiduciary duties.
Can I change my member-managed LLC into a manager-managed LLC?
LLCs are generally flexible to reorganize, so yes, you usually can change your member-managed LLC into a manager-managed LLC at a later date. That said, it can be easier to simply choose a manager-managed LLC upfront and deem all investors managers. It is much easier to change the managers of an LLC than to change the operating agreement.