One of the things American entrepreneurs love about the limited liability company as a business entity is the amount of flexibility and options it affords to its owners.
One such option is the choice between having your LLC managed by its own members, or whether to designate a manager who either does or doesn’t have ownership interest.
If you’re not sure which of these choices to use for your business, you’ve come to the right place. This article will take a look at every angle of LLC management, and hopefully along the way we’ll figure out which option is the best one for you.
What Is the Role of an LLC’s Management?
We should probably begin by explaining what exactly the management of your limited liability company entails. Regardless of whether you choose to be a member-managed or manager-managed business, your management is legally obligated to act in the best interests of your LLC at all times.
The role of your LLC’s management includes the following elements:
- Making minor decisions regarding legalities and financial issues
- Opening and maintaining business bank accounts
- Signing contracts
- Acquiring loans and securing financing
- Hiring employees and contractors
What Is LLC Member Management?
Member management refers to a limited liability company that elects to have its owners manage the daily operations of the company themselves. This is the default option for any new LLC that doesn’t specifically name a separate manager, and it’s also the more common choice by far ― the vast majority of LLCs are member-managed.
This is the preferred choice for most small businesses, as they don’t generate enough income to make hiring and paying a manager worth the expense. It’s also a solid option if your owners genuinely want to participate as much as possible in the day-to-day operations of your company.
Member management can get a bit tricky if you have more than just a few members, because the owners in this management structure will need to manage the company together, sharing equal responsibility.
Still, if your owners want to take care of the sale and transfer of goods and services, hiring and firing processes, financial minutiae, and more, your LLC should do quite well with member management.
What Is LLC Manager Management?
If you would rather hire someone from outside the limited liability company who doesn’t have ownership interests ― or assign the role to one or more of your existing owners ― you can designate a manager for your business.
Naming a manager who already co-owns the company does not change ownership shares, but instead simply gives that manager an additional responsibility beyond their ownership role.
Why do businesses choose manager management? The most common reason is that not all of the owners (or perhaps none of them at all) are interested in putting in the effort to manage the company themselves.
Some owners simply don’t have the spare time to spend on daily tasks that don’t have much of an effect on the company’s bottom line. Additionally, if your company has a large ownership group, it can be impractical and excessively time-consuming to have all of your owners share equally in the managerial role.
You will also often see the manager management structure used for businesses that are family-owned and operated. In this situation, the company is often passed down from generation to generation, and a manager is often used to ease the next generation into the company slowly ― for example, a parent maintaining the manager role while sharing ownership with their children.
To opt into manager management, you can indicate this decision in your articles of organization by identifying your manager. You should also enter this information into your operating agreement, but this part is not legally required.
Speaking of the operating agreement, a manager-managed company might want to go into detail in this document regarding the specific responsibilities and expectations for the manager position, as well as what degree of power the manager has relative to the ownership group.
Whether your manager is also an owner of the company or not, they are typically compensated for their management role. It’s important to note that LLC owners are not generally considered to be employees ― and as a result, they’re not compensated as such ― but if they serve in this dual role, you’ll probably want to pay them for taking on the additional responsibility.
Limited liability company management is usually handled by the LLC’s owners, but that doesn’t mean that it’s an objectively “better” choice for every business.
We all have different needs and desires for our businesses, and there’s no one-size-fits-all answer for the question of who should manage your LLC.
One aspect that could make this decision a bit easier is that you can change your mind later, as long as you keep the state updated, and also change your operating agreement to reflect it.
And, if you haven’t started an LLC yet, services like Incfile, LegalZoom and more make it easier than ever.