LLCs are great for investors and small businesses because of their flexibility. One of the first steps to customizing your LLC is to determine whether you want it to be member-managed or manager-managed. Here, we’ll discuss the difference (and which management structure is best for your business).
Option 1: Member-Managed LLC
An LLC’s owners are called members. The LLC’s members are like the shareholders of a corporation. Therefore, in a member-managed LLC, the business is managed by its owners.
Sole Member LLCs
If you’re the only member — often called the sole member — then you make all the decisions by yourself. Simple enough.
Multi-Member LLCs
If you have a multi-member LLC with more than one owner, the members will vote on decisions affecting the LLC. The LLC’s operating agreement should specify the required percentage vote for each type of decision.
For example, an operating agreement might provide for the following voting requirements:
- 51% of the membership interests to buy assets or extend a loan over $100,000.00
- 75% of the membership interests to admit a new member to the LLC
- 90% of the membership interests to dissolve the LLC and wind up the business
Operating agreements are flexible — you can set the voting thresholds wherever you and the other members want. In the above example, the voting percentages correspond to membership interests, which correspond to each member’s percentage ownership.
Alternatively, you could structure voting around the number of members voting (instead of percentage ownership:
- 2/3 of the members to buy assets or extend a loan over $100,000.00
- 2/3 of the members to admit a new member to the LLC
- All of the members to dissolve the LLC and wind up the business
“Fun” fact: LLCs are typically member-managed by default. See California Corporation Code § 17704.07(a). If you want a manager-managed LLC, you’ll have to say so in your operating agreement.
Option 2: Manager-Managed LLC
In a manager-managed LLC, the members appoint one or more managers to run the day-to-day business of the LLC. The manager can be a member, but it doesn’t have to be.
One Manager
One option is to have a single manager run the show. This is common in businesses like real estate syndications where one party makes most of the decisions.
Board of Managers
Other LLCs might have a board of managers — this is like a board of directors in a corporation. The managers make most of the decisions affecting the business, but they’re ultimately accountable to the members. The operating agreement should specify the required voting thresholds for decisions made by the board.
What Powers Do Members Have in a Manager-Managed LLC?
Most operating agreements say the members (the LLC’s owners) must vote on major decisions, such as:
- Changing the business of the LLC
- Replacing a manager
- Selling or dissolving the LLC
Each operating agreement is different. For example, in some businesses, members may retain the power to approve loans, open new offices, or make large investments. By working with an attorney, you can craft an operating agreement that is custom-built for your unique business.
What About Officers (CEO, CFO, COO, Secretary)?
Both member-managed and manager-managed LLCs can appoint officers to run the operations of the company.
Common officers include:
- Chief Executive Officer (President)
- Chief Financial Officer (Treasurer)
- Chief Operating Officer
- Secretary
Typically, officers in a member-managed LLC are appointed by (and accountable to) the members. In a manager-managed LLC, the managers select the officers.
You can identify your LLC’s officers in the operating agreement. Alternatively, the members (or managers) can select officers in written resolutions.
Which Management Structure Is Better? Member-Managed or Manager-Managed?
Your business’s ideal management structure depends on a variety of factors, including your LLC’s size, complexity, and member composition.
- Sole member: If you have a single-member LLC to hold a real estate investment property, a member-managed LLC is probably best. No need to complicate things.
- Multi-member, member-managed: A small, two-member LLC where both partners take an active role is a good candidate for a member-managed LLC. If each member owns 50%, you might require unanimous consent before taking action.
- One manager: If you’re the sponsor in a real estate syndication, a manager-managed LLC is best. You (or the LLC you set up for the sponsor) will be the sole manager, making the day-to-day decisions. The passive members will retain the power to make major decisions (like removing the manager), but you’ll be responsible for almost everything else.
- Board of managers: A manager-managed LLC with a board of managers is a good structure for businesses with a large number of members. Delegating authority to a board of handpicked managers takes the burden off the members. Plus, appointing multiple managers encourages careful decision-making and may be suitable for larger, more institutional LLCs.
Get Help Choosing the Perfect Management Structure for Your Business
LLCs empower you to customize your business to fit your needs. For some businesses, member-managed LLCs are perfect. More complex companies may benefit from a manager-managed structure.
If you need help forming a new LLC — or have other questions about starting, growing, or protecting your business — feel free to reach out.