Member-Managed or Manager-Managed Limited Liability Company (LLC): What’s the difference?

Posted by on May 20, 2013 in Business Law | 0 comments

Member-Managed or Manager-Managed Limited Liability Company (LLC):  What’s the difference?

Limited liability companies are intended to provide liability protection to owners (known as members) while at the same time giving the members maximum flexibility in corporate governance.  One of the choices an LLC must make when organized is whether to be “manager-managed” or “member-managed”.

A manager-managed LLC delegates management responsibility to one or more “managers” who will have fiduciary duties to the members of the LLC.  The LLC may be structured like a limited partnership in which one or more managers exercise all management control and make all day-to-day operational decisions of the LLC.  The members would be similar to limited partners with very limited or restricted say in the affairs of the LLC.  Alternatively, the LLC may be structured like a corporation where managers serve in a capacity similar to a board of directors (the managers may even compose a “board of managers”) that provides oversight and governance of the LLC, but delegates day-to-day operations to officers such as a president and one or more vice-presidents.  The members elect the board of managers and typically retain authority to vote on fundamental transactions of the LLC.

A member-managed LLC retains all management responsibility among the members who function like general partners in a general partnership.  Each member has a fiduciary duty to the other members.  The operating agreement must carefully set forth restrictions on the authority of a member to bind the LLC or otherwise take action on behalf of the LLC without approval by member vote.  For example, in a true general partnership each general partner may bind the partnership by its actions.  In most member-managed LLCs a member may only bind the LLC within certain limits with all other decisions requiring approval by a majority or supermajority of the members.

A member-managed LLC is useful for joint ventures or small, closely held LLCs with only a few members that do not intend to grow or expand through addition of new members.  The member-managed LLC structure allows more efficient and easier day-to-day operation of the LLC.  On the other hand, a Manager-managed LLC is more useful for an LLC that may want to delegate all responsibilities to one person or a small core of persons who do not need to seek approval from the members for major decisions.  A manager-managed LLC is also useful for LLCs that intend to undertake capital raises from sophisticated investors who will not want to run the LLC, but will demand seats on a board of managers in order to closely monitor their investment and provide guidance to grow their investment.

For more information on the operational structure of LLCs, please contact Andrew Miller, at (717) 845-1524 or .