When forming a limited liability company, you will have to decide how you wish for the business affairs of your company to be managed. When making this decision, there are a number of factors to consider: number of members, type of business, structure of the business, the decision-making process/authority, roles of individual members, etc.
When it comes to LLCs, there are two options on how to manage your company:
MANAGEMENT BY MEMBER(S)
If you are forming a single member LLC, then member management is probably right for you.
If there will be more than one member, then you should consider the following:
In a member managed LLC, each member has a say in the day-to-day operations of the company, and decisions are made democratically. While there are default rules for governing an LLC, members can agree to any policies/procedures that govern the management of the company. For more on this, see the article on Operating Agreements for LLCs.
Examples of a member managed LLCs:
Example 1: Jim Johnson makes a living providing landscaping for residential homeowners. He has a few employees; however, he has sole authority over the day-to-day affairs of the landscaping business. He wants to form an LLC to protect himself from personal liability from the operations of the landscaping business. Because he has a single member LLC and he is the only member with decision making authority, he decides that a member-managed LLC is the right choice for him.
Example 2: Jim Johnson and his two brothers, John and Jacob. They run a small cattle operation on family owned land. They have a good working relationship, and each brother has active role in the day-to-day operations of the cattle business. They want to form an LLC to protect themselves from personal liability stemming from the operations of the LLC. This is a good example of a member managed LLC, because each of the three brothers wants to have a say in how the small cattle operation is run, share the responsibility of the managing the operation, and as brothers, they spend a lot of time together, so they don’t have to go out of their way to discuss business operations.
MANAGEMENT BY MANAGERS
If a small number of close-knit members is good for a member managed LLC, then the opposite would be true for a manager managed LLC. In a manager managed LLC, the structure is such that it may be more efficient to address the daily business needs without having to hold a vote of the members. Manager managed LLCs may be right in the following situations:
Examples of manager managed LLC:
Example 1: Take our three Johnson brothers, rather than all three being actively involved in the family business, Jack has no interest in the cattle business, and he wants to focus solely on becoming a world-famous chef, so he is moving to Dallas to chase his dreams. In the scenario, a manager managed LLC may be the better option for the Johnsons. Jack maintains his financial interest in the cattle operation but is not bothered with the daily affairs of the business.
Example 2: Jack Johnson succeeded in becoming a rising star in the Dallas food industry, he is interested in opening restaurant his own restaurant with several investors, who want an ownership interest. The investors are spread out throughout the United States. Jack is the only member with experience in running a restaurant and meeting regularly to vote on issues involving day-to-day operations is not feasible given the distance, so they decided that Jack should manage the day-to-day of the LLC.
When it comes to LLCs, there are two options on how to manage your company:
MANAGEMENT BY MEMBER(S)
If you are forming a single member LLC, then member management is probably right for you.
If there will be more than one member, then you should consider the following:
- How many members will your LLC have? Generally speaking, if you have a small number of members who are actively engaged in the company, then a member managed LLC may be right for you.
- Does each member want to actively participate in management of the company?
In a member managed LLC, each member has a say in the day-to-day operations of the company, and decisions are made democratically. While there are default rules for governing an LLC, members can agree to any policies/procedures that govern the management of the company. For more on this, see the article on Operating Agreements for LLCs.
Examples of a member managed LLCs:
Example 1: Jim Johnson makes a living providing landscaping for residential homeowners. He has a few employees; however, he has sole authority over the day-to-day affairs of the landscaping business. He wants to form an LLC to protect himself from personal liability from the operations of the landscaping business. Because he has a single member LLC and he is the only member with decision making authority, he decides that a member-managed LLC is the right choice for him.
Example 2: Jim Johnson and his two brothers, John and Jacob. They run a small cattle operation on family owned land. They have a good working relationship, and each brother has active role in the day-to-day operations of the cattle business. They want to form an LLC to protect themselves from personal liability stemming from the operations of the LLC. This is a good example of a member managed LLC, because each of the three brothers wants to have a say in how the small cattle operation is run, share the responsibility of the managing the operation, and as brothers, they spend a lot of time together, so they don’t have to go out of their way to discuss business operations.
MANAGEMENT BY MANAGERS
If a small number of close-knit members is good for a member managed LLC, then the opposite would be true for a manager managed LLC. In a manager managed LLC, the structure is such that it may be more efficient to address the daily business needs without having to hold a vote of the members. Manager managed LLCs may be right in the following situations:
- Large number of members
- Some members want to take a less active role in the management of the company
Examples of manager managed LLC:
Example 1: Take our three Johnson brothers, rather than all three being actively involved in the family business, Jack has no interest in the cattle business, and he wants to focus solely on becoming a world-famous chef, so he is moving to Dallas to chase his dreams. In the scenario, a manager managed LLC may be the better option for the Johnsons. Jack maintains his financial interest in the cattle operation but is not bothered with the daily affairs of the business.
Example 2: Jack Johnson succeeded in becoming a rising star in the Dallas food industry, he is interested in opening restaurant his own restaurant with several investors, who want an ownership interest. The investors are spread out throughout the United States. Jack is the only member with experience in running a restaurant and meeting regularly to vote on issues involving day-to-day operations is not feasible given the distance, so they decided that Jack should manage the day-to-day of the LLC.
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