Last updated on April 3rd, 2019
One of the important decisions you make when you start a business has to do with how your business is owned and managed. In the legal context, one of the advantages of a corporate structure is the separation of ownership and control.
In a corporation, you have owners (shareholders), and people who manage the day-to-day operations (Board of Directors, Corporate Officers, Executives, etc.).
Frequently in the corporate context, owners and large shareholders are in a position to also control the direction of the corporation.
Virginia Limited Liability Companies also make decisions about ownership and control, but they use different words to talk about this concept.
In the LLC context, their are two primary ways to own and run your business: Member-Managed and Manager-Managed.
A member-managed LLC is as the title suggests: the members of the LLC (the owners) also manage the LLC–they control the day-to-day operations.
Members hold interest in the ownership of the business while overseeing the day-to-day functions and management. For smaller business entities, this is an ideal form of management which eliminates outsourcing executive positions. For small startups, this allows members operational control and grants the founders of the business carte blanche to take the business in the direction they choose.
Member-management is established during the formation of your LLC and is the most common form of management among limited liability companies.
By contrast, a manager-managed LLC is established when the founding members agree to share interest in, but not management of, the business.
This is typically established during the formation of the LLC, at which time members generally voice their disinterest in business management. These responsibilities can be taken on by one or two members who are interested in managing the LLC, or they can be outsourced to non-members.
Sharing the responsibilities of management when your LLC has many members can become problematic for productivity. In these cases, manager-managed structures are typically better business options.
It is equally important to assess the abilities of the members in terms of business management. If the members are found to be incapable or incompetent when it comes to the daily task of managing aspects of the business’ operation, a manager-managed LLC is a recommended alternative.
Additionally, the Manager-Managed LLC often serves a purpose as an investment vehicle. Investors can use this LLC structure to group funds together and hand off responsibility of management to a separate organization. This structure could provide the flexibility of an LLC to investment projects where the formalities of a corporation aren’t necessary.
Managing Your LLC Management
You should state your LLC management structure in your operating agreement. The LLC operating agreement is the contract that all LLC members sign that sets down how the LLC will be run.
If you fail to address management of your LLC in the operating agreement, a Member-Managed structure is presumed. If you wish to operate a Manager-Managed LLC, you should state this in your operating agreement.
It is good practice to indicate your management structure in the operating agreement, no matter which choice you make.
In the operating agreement you can set out and even limit the powers of your managers. The LLC is a very flexible corporate structure, and the operating agreement allows you to tailor your business to your needs. Take full advantage of the operating agreement’s assignment of powers when opting for a Manager-Managed LLC structure.
Sometimes, a business structure changes: the small business becomes a bigger business, the number of invested members grows, or circumstances change the way that the business should be managed. If members become too busy to handle the additional management responsibilities that come with member-management, amending the business structure is ideal.
It is possible to become a Manager-Managed LLC after the formation of your business. The members must amend their agreement by a vote in order to enact any new changes to management.
It’s a good idea to consult with a lawyer before making substantive changes to your business’ established structure.
Knowing whether you’re establishing a Member-Managed or Manager-Managed LLC is important to the future of your business. Carefully consider and discuss your options by scheduling a consultation with our business law attorney.