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 you can tailor the management structure to your specific business. For example, you have several management options, including the following:
- An LLC can be managed by its members or by one or more managers.
- The management structure may include designated members, non-members, or a combination of both.
- The members may appoint a single individual (member or non-member) 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. Accordingly, below are some points to consider.
Member-Managed LLC
In a member-managed LLC, the members share responsibility for the business’s day-to-day operations. The members usually make business decisions through a voting process described in the Operating Agreement. Unlike a corporation, a member-managed LLC has no board of directors, but members may appoint officers. Although most attorneys do not recommend a member-managed LLC, this type of “flat” management structure may work for:
- Smaller LLCs where all members can and will work in the business;
- LLCs with simple ownership structures; and
- Members who get along and work well together.
It is important to note that if the LLC Articles of Organization and the Operating Agreement are silent on management structure, most state LLC statues generally default to member-managed LLC.
Manager-Managed LLC
In a manager-managed LLC, a single manager or a team of managers oversees the day-to-day operations of the business. LLC members do not control the day-to-day business operations, but 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. Therefore, it usually fits more complex LLCs. This type of management structure works well for:
- LLCs with members who only want to be passive investors with no involvement in the LLC’s operations;
- Larger LLCs that require a team focused on management activities; and
- LLCs offering complex goods or services where a manager’s expertise is required.
In most states, the organizers must specify the manger-managed structure in the Articles of Organization 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, and the Operating Agreement often requires a supermajority vote. Once the members approve an LLC amendment to the Articles of Organization, they typically file it with the state to record the change.
Conclusion
Choosing the LLC’s management structure is an important part of the business planning process. Ultimately, thorough, well-drafted formation documents, the Articles of Organization, and Operating Agreement, are central to ensuring you structure your LLC the way you want at the outset yet keep it flexible enough to accommodate changing business needs.
If you are interested in learning more about options to protect you and your loved ones, please call Cox Law Group to schedule an appointment. (410) 988-3973. www.TheCoxLawGroup.com
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This blog post is for informational purposes only and does not constitute legal advice. For guidance on your specific situation, please consult an attorney licensed in your jurisdiction.