If you decide to form your company as an LLC, you must decide on the management structure of the LLC in order to draft the LLC operating agreement. Under some LLC operating agreements, all members fully participate in the daily operations of the business. Other LLC operating agreements designate managers to handle operations.
You will need to draft an LLC operating agreement that clearly establishes management responsibilities. Any mistake could significantly impact who actually has management control and what rights members retain. Hiring a startup or corporate attorney from the Priori network can help you select the appropriate management structure and draft a well-written LLC operating agreement.
Member-Managed vs. Manager-Managed LLCs:
The members or owners of a member-managed LLC are responsible for the day-to-day operations of the business, while only certain designated members (or even outside appointees -- for example, a board of directors) run the operations of manager-managed LLCs. The core difference between the two is that manager-managed LLCs can have passive investors written into the business structure. In member-managed LLCs, all owners have a voice proportional to their share. Member-managed LLCs tend to require each investor to serve a much more hands-on role than manager-managed LLCs, since each member can be involved in any decision, not just large issues subject to a vote.
Benefits of Member-Managed LLCs:
In most states, a member-managed LLC is the default type of LLC. This format is considered typical, particularly for small businesses with very few members. Functioning as a member-managed LLC is advantageous for your startup if you want to ensure that each member has significant input regarding the operations of the business.
Benefits of Manager-Managed LLCs:
A manager-managed LLC is less common, but it is very useful if you want your startup to run more like a corporation. When an LLC is manager-managed, owners of the LLC exercise their control by voting on key company issues, rather than being actively involved in the company's day-to-day operations. This can be advantageous for your startup in the following situations:
- Large Size. If your startup is large in size or has a relatively large number of owners, it is not practical for all members to be involved in each decision regarding the management of the company. Instead, a manager-managed LLC has the ability to respond quickly to changing economic conditions and act without heavy administrative burdens. This also allows members to recruit the help of outside counsel and non-members with specific areas of expertise when making decisions.
- Desired Anonymity. Generally, all members must be listed publicly within the LLC operating agreements of member-managed LLCs. More anonymity is available in manager-managed LLCs.
- Passive Ownership. In certain cases, you may have members who are not interested in taking an active role in the business. A manager-managed LLC makes it possible to appoint one or several managers to handle the affairs of the company, leaving other members free to maintain a passive role.
The Role of LLC Operating Agreements
LLC operating agreements are vital to the operations and management of LLCs. Because these agreements help establish the roles of the managers and members, LLC operating agreements serve to define not just which type of management structure is used, but also what level of control and decision-making abilities the managers and members have. If you fail to specifically delineate these types of roles and decisions in the LLC operating agreement, state law will apply as a default, which can result in giving unintended control to certain members or leaving members open to liabilities. A startup attorney can help you to avoid this situation by drafting a clear LLC operating agreement that addresses all appropriate issues.
Depending on the complexity of your governance structure, plans for investment and growth, and the number of owners, the cost of having an LLC operating agreement drafted for your LLC can vary. When you hire a lawyer in the Priori network, forming your LLC and drafting an LLC operating agreement typically costs anywhere from $350-$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.
Can I switch the management structure of my LLC at a later date?
LLCs are generally easy to reorganize and flexible in terms of changing structurally, so yes, you usually can change the management of your LLC at a later date.
How many managers can my manager-managed LLC have?
There is no limit to the number of managers, and you define their scope of involvement. It is perfectly fine to let all investors act as managers.