Member-managed LLC Vs. Manager-managed LLC: Which Structure Best Fits Your Business?

What Is a Member-Managed LLC?

A member-managed LLC includes members (owners) in company operations, making each an “agent” to officially act on behalf of the company. This structure doesn’t necessarily require administrative responsibilities and power to be divided equally. It can, however, be built to keep members from being brought on as passive investors. Member-management is the default structural designation in most states, meaning that if it’s not specified in an LLC’s articles of organization or operating agreement, all members may be considered managers.

Who Are Member-Managed LLCs Best For?

Member-management is best for LLCs with a small number of investors who want to keep things streamlined and claim direct responsibility for company operations. The LLC structure is popular in the first place due in part to its simplicity and the degree of control it affords, so it’s no surprise member-management is a common option for LLC owners. Member-management’s typical distribution of responsibility is similar to that of a partnership, which has key differences when it comes to liability but is also a popular choice for small businesses with a smaller number of actively engaged owners.

Member-management usually suggests that to be an investor, one must be able to serve in a hands-on managerial role, but this isn’t always the case. For some businesses, this is great, as it leaves decision-making power only in the hands of members with a certain level of personal investment and engagement. Much flexibility exists in how a business can be structured, but with a more complex design comes more risk and more complication. Consult your legal professional to determine the best way to structure your business.

What Is a Manager-Managed LLC?

A manager-managed LLC delegates operational control to designated managers. LLC members can often still vote on key issues but don’t act as managers of the company and aren’t considered agents. For LLCs with many members, consolidating or “centralizing” administrative responsibilities and power can be much more practical than decentralized management. That said, this structure can work fine for LLCs with small memberships, too—it’s just a matter of preference. An LLC can have one manager or several—there’s really no limit—but the number of managers is usually much smaller than the number of members.

Who Are Manager-Managed LLCs Best For?

As with a corporation, a manager-managed LLC allows for passive investors. This allows the LLC to extend membership to people who don’t want to be involved in day-to-day business operations. Indeed, the role of a manager or managers under this structure is not dissimilar from that of a corporate director. Manager-management is preferable for LLCs that value the ability to attract diverse investors.

A manager-management structure is also a good choice for businesses with members not experienced in management or the business’s industry. Because designated managers don’t actually have to be existing members of the LLC, manager-managed LLCs are likely to have an easier time attracting competent management. People who already have a job and are not interested in devoting work to the business are typically better suited to be members of manager-managed LLCs.

Use the chart below to compare some of the most notable pros and cons at a glance.

	Member-Managed LLCs	Manager-Managed LLCs
Good for Small Memberships?	Yes	Okay
Good for Large Memberships?	No	Yes
Simplicity	More streamlined	Less streamlined
Allows Passive Investment	No	Yes
Attracting Investors	Harder	Easier
Attracting Qualified Management	Harder	Easier
Decision-Making Speed	Slower	Faster
Member Control	High	Low

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What Is an Operating Agreement?

An operating agreement is a contract between members of an LLC documenting how the organization will be run and how key decisions about the company should be made, such as how compensation is distributed, how essential procedures will work and how the business would like to be taxed.

Operating agreements should indicate which management structure the LLC has chosen and describe the allocation of administrative rights and responsibilities amongst members. Having an LLC’s structural designation and accompanying details documented in writing can be particularly important if and when legal issues or other disputes arise.

Operating agreements don’t need to be filed with a state as articles of organization do. Having an operating agreement is, however, strongly recommended. The operating agreement should be updated as necessary as a company grows. Operating agreements can prove to be particularly important in the event of disputes between members or legal issues. Without one, the company operates according to the default provisions in the state LLC law.

How Do I Create an Operating Agreement?

It’s not recommended to try to write an operating agreement from scratch without a legal background. Instead, follow a free template or step-by-step instructions found online through law libraries or legal help websites, or explore sites with business formation resources such as Legal Zoom or Rocket Lawyer. These offer many services specifically geared toward LLCs including interactive programs providing semi-generic operating agreements based on a series of questions.

LLCs with unique considerations, above-average complexity or more than a couple of members should consider hiring professional legal help. While this is the most expensive option, the cost of starting an LLC is still less than that of a corporation and money spent on securing legal safeguards is typically money well spent.

With LLCs, power and decision-making rights usually come in step with degrees of obligation and responsibility to the company. This certainly holds true when it comes to deciding between a member-managed or manager-managed structure for your LLC. There is no single right answer, of course—the choice depends on the nature of the company and the desires and strengths of its members. Be sure to devote serious time and thought to this decision, as it can have profound financial, practical and legal impacts on how a business develops.