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LLC Member vs. Manager

Creating a limited liability company (LLC) is a great way to start your small business, but you will face major decisions about its structure at the time it is formed. LLCs may be set up as member-managed or manager-managed and the structure you choose will significantly impact how much control you and the other owners will have over day-to-day operations.

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What to Consider for Your LLC Management Structure

In most cases, an LLC must file its formation documents with the secretary of state's office in your state. Formation documents include the LLC's articles of organization and the LLC's operating agreement.

The operating agreement will name the management structure the LLC will use. The two management structures available to a limited liability company are a member-managed LLC and a manager-managed LLC.

The LLC members must also decide what other details to include in the operating agreement, including the number of members and the board of directors.

Remember that most state laws require the operating agreement to state whether the LLC will be a member-managed or a manager-managed company. If the management structure is not specified, most states will treat a company as a member-managed LLC by default.

Member-Managed LLC

A member-managed LLC is one where the owners collectively manage the company. The owners of an LLC are called members and they control the day-to-day operations of the member-managed company.

In a member-managed LLC, each member has an active role in the everyday decision making for the business.

A member-managed LLC is an appropriate management structure for a small business. By operating as a member-managed LLC, small businesses with limited resources may carry on business without using resources from the business to pay a group of non-member managers.

There is no minimum number of people required to form an LLC and an LLC can have just one owner. An LLC that has only one owner is a single member LLC. Just like with a multi-member LLC, the owner of a single member LLC has personal liability protection from lawsuits against the business.

Manager-Managed LLC

A manager-managed LLC is a better choice for larger LLCs or LLCs with many members. In a manager-managed LLC, the managers are usually passive investors in the business.

Business owners can choose to hire a non-member to work as a manager. Hiring a non-member can reinforce the separation between the daily operations of the business and the decision-making processes.

Operating Agreement

An operating agreement is a formation document for an LLC. The operating agreement will state whether the business will be a member-managed LLC or a manager-managed LLC. It should also describe the roles of the managers and members of the LLC.

If the type of management structure is not specified in the operating agreement, the law in most states will make the LLC member-managed by default.

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