Member-Managed LLC vs. Manager-Managed LLC: Which Should You Choose?
Member-managed LLCs and manager-managed LLCs differ based on whether the owners make day-to-day business decisions.
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Updated · 3 min read
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Nerdy takeaways
- Owners operate member-managed LLCs while an elected manager runs a manager-managed LLC.
- A member-managed LLC is the default structure unless your operating agreement states otherwise.
- The person or group responsible for management can make financial and legal decisions on the company’s behalf.
In a member-managed LLC, the owners have collective control over company decisions. A manager-managed LLC places management authority in the hands of a professional manager.
How LLC management works
A limited liability company (LLC) is a business structure that offers owners limited personal liability for the business’s debts and obligations. It’s a popular type of business structure because it’s easier to form and maintain than a corporation.
An LLC can have one owner (a single-member LLC) or multiple owners (members). If you’re the sole owner, you don’t need to decide between member management and manager management — by default you are in charge of all management decisions.
Management becomes more complicated when a company has multiple owners or investors. In that case, the LLC can be member-managed, where all the members run the LLC, or manager-managed, where the members elect a manager (who may or may not be a member) to handle day-to-day operations.
Whoever is in charge of management will be able to make decisions on behalf of the company, which may include:
- Entering into legally binding contracts and signing agreements.
- Buying and selling real estate, equipment, vehicles and other business assets.
- Opening, closing and managing business bank accounts.
- Hiring employees and other staff members.
- Borrowing money through a business loan.
Typically, member-management or manager-management is decided when you file your LLC’s articles of organization with the state. Management authority is delineated in more detail in the LLC operating agreement.
» MORE: What are the benefits of an LLC?
When to choose a member-managed LLC
You want equal power.
A member-managed LLC places management authority in the owners of the LLC. Each owner has a voice in decision-making. Depending on the specifics of the operating agreement, owners might have equal say or authority might be proportional to the level of ownership in the business. For instance, a partner who owns 40% of the LLC could have twice as much authority as a partner who owns 20% of the business.
In a member-managed LLC, each owner is an agent of the LLC and has the power to bind co-owners by signing company contracts, borrowing money and making other decisions. But members must vote to approve such decisions.
You want to be actively involved.
If you and your owners want to be actively involved in the company’s affairs, this may be the right choice for your business. For instance, let’s say you jointly own an e-commerce business with one other person. You want to launch and run the website, and your co-owner wants to handle marketing and pricing. Since you both are actively operating the business, a member-managed LLC makes sense.
You want a simple structure.
In some states, member-managed LLCs are the default management structure. If you don’t specify a management structure in your LLC operating agreement, you’re by default a member-managed LLC. A member-managed LLC generally costs less to operate because it doesn’t have officers or a board of directors the way a corporation would.
Pros and cons of member-managed LLCs
Pros
All members have control over management decisions.
Less complicated structure, particularly for small companies.
Good choice for retailers and other brick-and-mortar businesses.
Cons
Management of the LLC can be a full-time job, taking owners’ time away from strategic decisions.
This structure makes it difficult to raise money from investors.
There could be potential conflict among members regarding decision-making.
When to choose a manager-managed LLC
You want quick decisions.
Owners elect a manager or managers to handle day-to-day business decisions but members still retain authority over some things, such as dissolving the company.
The manager is the main legal agent of the LLC and can quickly make decisions on behalf of the business without waiting for all members to approve. There can be one manager or multiple managers, and the manager may or may not be a member.
You want investors.
Most investors are passive investors or “silent partners.” This means they own a portion of the business but don’t have the time or expertise to make daily decisions. For instance, in a family-owned business, parents can keep management authority while entrusting their children with some ownership.
You want a large company.
A manager-managed LLC is also helpful if you have a large company with many owners. If you have more than four or five owners, it can become challenging to get everyone together to vote on management decisions. It’s often better to delegate management responsibility — which can amount to a full-time job — to a few of the members or a professional manager.
Pros and cons of manager-managed LLCs
Pros
Encourages investors to passively invest in the business.
Makes it easier for large LLCs to operate quickly.
Centralizes decision-making authority.
Cons
All owners don’t get to participate in management decisions.
A professional manager might not understand the business as well as the owners.
Smaller businesses may incur greater costs to employ a professional manager with a competitive salary.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.
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