Determining who will manage the day-to-day affairs of your business is an important decision. You need to know, at the outset, who will manage operations, both for the success of your business and because the Limited Liability Company (LLC) operating agreement demands it. Luckily, LLC operating agreements are very flexible and the management structure can be tailored for your business.
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An LLC can be managed by its members or by one or more managers.
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The management structure may be comprised of designated members, non members, or a combination of both members and non members.
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The management structure need not be a group; a single individual (member or non member) can be appointed to manage a manager-managed LLC.
Given the flexibility and wide range of choices, it can be challenging to decide what type of management will work best for your LLC. Here are some points to consider.
Member-Managed LLC
In a member-managed LLC, all the members share the responsibility for the business’s day-to-day operations. Business decisions for the LLC are usually made through a voting process described in the operating agreement. Unlike a corporation, there is no board of directors in a member-managed LLC, but officers may be appointed. Although most attorneys do not recommend a member-managed LLC, this type of “flat” management structure may work for:
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Smaller LLCs in which all members can and will work in the business
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LLCs with simple ownership structures
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Members who get along and work well together
It is important to note, if both the articles of organization and the operating agreement of an LLC are silent on management structure, most state LLC statutes default to a member-managed LLC.
Manager-Managed LLC
In a manager-managed LLC, a single manager or a team of managers oversee the day-to-day operations of the business. Although LLC members do not control the day-to-day operations of the business, they usually retain the right to replace a manager. It is crucial that the operating agreement address the members’ rights to hire and fire managers.
The manager-managed LLC is more complex than a member-managed LLC and is usually a better fit for more complex LLCs. This type of management structure works well for:
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LLCs with members who only want to be passive investors with no involvement in the LLC’s operations
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Larger LLCs that require a team focused on management activities
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LLCs offering complex goods or services in which a manager’s expertise is required
In most states, the articles of organization must specify the manager-managed structure to avoid the default member-managed LLC structure.
Changing LLC Management
The operating agreement should specify the process for changing the LLC’s management structure. The LLC members typically must vote to approve the change, usually requiring a supermajority vote. Once approved, an amendment to the articles of organization usually must be filed with the secretary of state’s office to record the change.
Conclusion
Choosing the LLC’s management structure is an important part of the business planning process. Thorough, well-drafted formation documents—the articles of organization and operating agreement—are central to ensuring your LLC is structured the way you want at the outset, yet flexible enough (by a supermajority or unanimous vote of the members) to accommodate changing business needs.
We’re happy to work with you to understand your business needs and ensure your LLC’s articles of organization and operating agreement work together to cover your LLC’s management goals. Contact us now for a consultation.