Member-Managed LLCs vs. Manager-Managed LLCs
As a business owner or founder in Pennsylvania, there are many tasks on your plate as you work to get your company up and running. One of the first tasks you’ll need to tackle is forming your limited liability company (LLC).
An LLC is a business structure that provides protection against liabilities for owners, also called members. Within this LLC, you must decide how you will manage your business. You can choose between a member-managed LLC or a manager-managed LLC.
Both options have their pros and cons, and choosing the best one will depend on the size of your business and your long-term goals. Consulting with a Pennsylvania business attorney can help you find the best choice for your company and ensure you put the right people in charge.
What Is a Member-Managed LLC?
A member-managed LLC is a commonly used business structure for smaller companies with a limited number of owners. With this system, members share in the decision-making and act on behalf of the company by playing an active role in day-to-day operations.
For small or mid-size businesses that do not require a larger, separate management system like a board of directors to operate, member management is ideal, as all members can have a say in the financial and legal decisions for the business. Member management is the default structure of LLCs in many states, meaning if you do not specify what type of management you want, all members within your LLC may be considered managers.
For example, if you want to run your own business providing a certain service or making and selling products — such as running a bakery — you may decide on a member-management structure for your LLC. You can run the business as a single-member-managed LLC or offer equal authority to several members. You can also decide how much of a say you want everyone to have, such as giving one member 30% of the LLC and another member 15%.
What Is a Manager-Managed LLC?
A manager-managed LLC means that the member-owners delegate operational control to a designated person or persons, or “managers,” to run the company. This could include hiring an outside manager or choosing one or more members to be managers.
While members may still be able to vote on key business issues, they will not be considered agents or managers of the LLC unless specifically designated as such. Manager management LLCs provide a centralized, practical structure that is ideal when one or more members within the business want to take on a more passive investor role.
Rather than splitting the responsibility, some owners may feel more comfortable if they can delegate the management role to one or more members or an outside manager. With this structure, the manager or managers will handle day-to-day business activities and decisions.
An example of a manager-managed LLC could be a business requiring hands-on day-to-day management, but the owner members have other employment or will be physically away from the business much of the time. This would allow a designated on-site or engaged manager to make decisions for the business quickly and efficiently.
Differences Between Member-Managed LLCs and Manager-Managed LLCs
The main difference between member-managed and manager-managed LLCs is how hands-on you and any members want to be in running your business.
In a member-managed LLC, all members have an equal say. There is no limit to the number of members an LLC can have unless your business is being taxed as an S corporation, in which case the limit is 100 members.
In a member-managed LLC structure, every single member has the authority to manage daily operations, handle loans, sign contracts and make important business decisions. This is a common structure for those who prefer to work directly with their customers.
In a manager-managed LLC, most decisions are up to managers, who can either be LLC members or outside professionals. In a manager-managed LLC, members who are not managers are considered passive investors, meaning they have no say in important business decisions.
A manager-managed LLC can be a fitting option if you plan to have many members within your LLC or want to expand your business in the future. Because member-managed LLCs tend to be the default option unless specified, it is important to disclose if you want a manager-managed LLC in your Articles of Organization when you file for your LLC.
Roles and Responsibilities of an LLC Manager
In a member-managed LLC, you and other members will take a majority vote for many of the important decisions. However, in a manager-managed LLC, the owner still has some responsibility for high-level decisions while the manager or managers take on certain tasks that are required to run the business, which include but are not limited to:
- Running daily operations
- Hiring employees, staff and independent contractors
- Firing employees, staff and independent contractors
- Writing checks
- Make legal decisions
- Entering contracts on behalf of the business
- Merge or acquire another business
- Open an LLC bank account
- Obtain a loan or financing
- Buy and sell real estate, investments and vehicles
- Process high-level transactions
- Dispose of the LLC’s assets
The responsibilities and standard of conduct for LLC managers are governed by your state’s LLC laws and have a legal obligation to act in the best interest of the LLC.
If the manager is also a member of the LLC, they will fill both roles as an owner and manager. This means the individual or individuals are entitled to both LLC earnings and member shares determined by their percentage of ownership and manager wages.
Keep in mind, if you choose a manager-managed LLC structure, it is wise to specifically outline and document the roles and responsibilities of the manager for your LLC in your business’s Operating Agreement.
Member-Managed LLC Pros and Cons
A member-managed LLC structure is popular due to its simplicity and degree of control you and other members have over the business. This type of LLC structure resembles more of a partnership compared to a manager-managed LLC and is generally ideal for small businesses with owners who want to be actively invested and engaged in the company.
Here are the advantages of choosing a member-managed LLC:
- Ensures all owners have a say in the company
- Provides a simple, straightforward structure
- Fits the needs of companies with a small number of members
- Works well for owners who express interest in participating in all daily operations
- Costs less than hiring one or more professional nonmember managers
- Helps small retail and brick-and-mortar owners run their business
You may find a member-managed LLC an attractive option if you prefer to be in control over all the details of your business. Some owners want to be involved in every decision. You may also want to go the member-managed route if you enjoy working with your fellow business members or want to reduce costs by eliminating the need to pay one or more outside managers.
Here are the potential drawbacks you may experience with a member-managed LLC structure:
- Can require much time and effort for daily management, distracting from other projects and decisions within the company
- Lacks passive roles which can make it challenging to raise money from investors
- All decisions may require a unanimous vote, potentially causing delay and inconvenience for business operations
Manager-Managed LLC Pros and Cons
A manager-managed LLC may be ideal if you are planning to run a larger business and want to attract diverse investors. This type of LLC structure allows you to extend membership to investors who do not necessarily want to be involved in daily operations. An LLC manager handles daily operations, which can be a saving grace if neither you nor your members have any management experience or knowledge about your company’s industry.
Here are the benefits of choosing a manager-managed LLC:
- Provides more streamlined management
- Lightens the workload for other members
- Strengthens your LLC with a highly qualified manager
- Offers potential outside investment opportunities
- Attracts passive investors who do not want to play an active role in daily operations
- Provides anonymity within an LLC agreement as you can list your manager(s) name instead of your own
- Allows one or several managers to make decisions faster and easier without consensus
- Limits strategic business decisions to a small group of people
A manager-managed LLC may be useful if your business is large in size and you want to run it more like a corporation. Additionally, if you prefer to have more agility, managers have more freedom to act quickly and decisively without waiting on a vote from all members and wasting time.
However, there are several potential downsides of a manager-managed LLC, which can include:
- Requires more detailed, complex documentation
- Cuts some or all owners out of strategic financial and legal decisions
- Necessitates a more complicated Operating Agreement to list manager roles and responsibilities
- Costs more money, as the LLC may have to pay a manager’s salary to one or more managers
- Removes personal, small business owner decisions, as a professional manager may not understand the business as well
Tips for Deciding Which Option Is Best for Your Business
Both LLC management options offer unique advantages and disadvantages, so how do you choose which one is right for your business? Here are some general tips to help you decide how you want to structure your LLC.
1. Determine the Current and Future Size of Your Business
Generally, small businesses with only a few members benefit from member-managed LLC structures because there is not as much to oversee. For instance, if you run a small family bakery, you may want to “keep it in the family” and allow all members to have a say in what happens to your business down the line.
However, if your business is large, complex or consists of many members who want to be a part of the business, it is wise to go with a manager-managed LLC for optimum management engagement and to boost efficiency. You may also wish for your small startup to expand as quickly as possible. When hoping for or anticipating a lot of quick growth, you can appoint one or two members of your business as managers or decide to hire an outside professional who can run things smoothly.
2. Decide the Type of Role You Want to Play
One of the most important aspects of choosing what type of LLC structure you want for your business is determining whether you and your current members want to play a personal, active role in all day-to-day operations.
For example, do you want all members to have an equal say in every legal, financial and operational decision? Additionally, do you believe you and other members will have the time to vote on every single decision that must be made? If so, then a member-management LLC will work for you.
If you or other members of your business would like to play more passive investor roles in the company, a manager-managed LLC could be the better option. In these situations, you and the other members may be more comfortable delegating responsibilities to a manager so you can focus on other aspects of the company.
3. Consider What Skills and Expertise Your Business Requires
If you or any of your current members do not have experience in running a business or managing one in your company’s industry, it may be beneficial for you to rely on a professional manager who can steer you in the right direction.
Venturing out into a new market can be daunting, particularly if you do not have the skills needed to keep everything on track. A manager-managed structure can give you peace of mind knowing you have competent management taking care of financial and legal decisions.
However, if you run a small business with limited resources and feel confident that all members can share all day-to-day responsibilities, then a member-managed structure can be a great option.
4. Consult With an Attorney
While it is not a legal requirement to hire an attorney before setting up your LLC, it can help you save time, protect your assets and choose the best structure for your LLC.
When forming your business’s LLC, you will need to include your management decision in your Articles of Organization and file them with the state of Pennsylvania. If you decide to go with a manager-managed LLC, you must include details about the manager’s duties, how you want the business to be run, how you will share the profits and the responsibilities of passive members.
Working with an experienced business attorney can streamline this process for you and help you avoid making mistakes when filing the required documents. Your attorney can also draft your Articles of Organization and your Operating Agreement for you. In addition, your attorney can perform various important duties to help keep your LLC in good standing and keep your business complaint, such as:
- Checking to ensure the name you wish to use for your LLC is available
- Registering your LLC’s name
- Ensuring you have the correct documents and have paid all necessary fees
- Acting as your LLC’s registered agent
- Processing tax forms, service of processes and legal documents
Considerations to Keep In Mind for LLCs in Pennsylvania
Each state has different laws regarding how to form your LLC, how to maintain it and how you must manage it. Pennsylvania is one of the states that has member-managed LLCs as the default structure.
Because it is the default, you will not necessarily have to document this decision if you choose a member-managed LLC, but you will need to document it if you choose a manager-managed LLC. However, even if you choose a member-managed LLC, you should still outline certain business-related information in your Operating Agreement.
An LLC Operating Agreement is not a legal requirement to run a business in the state. However, without an operating agreement, the personal assets of the LLC members are vulnerable should the company be involved with legal action. Therefore, these agreements are optional but are recommended to provide clarity with respect to your business operations. You can also use an Operating Agreement to limit the decision-making abilities of LLC members, such as restricting authority over certain transactions.
You will also want to consider the amount of liability your members have with the LLC structure you choose. While passive members in a manager-managed LLC tend to have less liability, those who play an active role have more liability. If you choose a manager-managed LLC, it may be wise to choose a manager who is an active member if you have liability concerns.
Learn How MPL Law Firm Can Help You Find the Best Solution
LLCs generally allow for flexibility and administrative ease. If you are ready to create an LLC but are still unsure about the type of management you need, talking to an experienced business attorney who knows the laws in your state can help you find the right choice. At MPL Law Firm, it is our goal to help you structure and manage your LLC correctly and align your business processes with your short- and long-term goals.
A business attorney from MPL Law Firm can review your contracts, advise you on legal matters and ensure your business stays compliant. Whether you are a small business owner or manage a large corporation, we can work with you to get the most desirable results.
Our Central Pennsylvania law firm is ready to help. Contact us online or call us today at 717-845-1524 to get started.