When you first start up as a small business there are ALL sorts of questions to answer. In those beginning stages, it can definitely feel overwhelming... but if you get a solid foundation in place? Your entrepreneurial journey will go that much smoother.
One question you’re definitely going to have to address is: What type of legal form should my business take?! Should I be a sole proprietor, a Limited Liability Company (LLC), a S-corporation or something else? And not only that...what are the actual benefits or drawbacks of each type of legal form and how and where do I go about filing for a certain type of business?
The answer to these questions will depend on your unique needs, and in making the decision about business formation, there are key terms you will want to understand. (Tap on these links to find out more about a Sole Proprietorship or S-Corp.)
In this post, we are talking about the LLC structure. If you are considering filing for an LLC, you’ll want to understand the difference between amember-managed vs.a manager-managed LLC. This question will come up when you are actually filing for legal formation with your Secretary of State and you will have to choose one or the other when you file your articles of organization, so it’s important you understand what you are choosing to do when forming your business legally!
What is an LLC?
First, what is an LLC? LLC stands for Limited Liability Company and is one of many business structures you can choose from when starting a business. An LLC is the simplest business entity to form, and provides business owners more protection of their personal assets. This is done by creating a company (a corporation) that acts as its own legal entity and has its own rights outside of any owners or agents of the company. This provides owners of the company with limited liability regarding business decisions, such as being not personally liable for any debts incurred by the LLC or being liable for most business-related lawsuits. Essentially the LLC will act as a shield or additional form of protection for owners to protect their personal assets from business related issues. However running an LLC is more complicated and requires your business to be truly separate from owners personal expenses, accounts, assets, etc. then other formations such as sole proprietorship.
If you are deciding what the best type of business is for you I highly recommend visiting the Small Business Administration’s website for more information and details about the different types of business formation.
What Is a Member-Managed vs. a Manager-Managed LLC?
Member- Managed LLC
When forming your business your State will require you to choose whether you would like your LLC to be a member-managed LLC or a manager-managed LLC. So what’s the difference?
A member-managed LLCis where every member of the business shares the responsibilities and burdens to collectively manage the business. All members will share in the day-to-day running of the business and there is no upper level of management. This approach is very common for small business owners since most owners generally want to play an active role in the running of the business. This is also often the default choice when forming your LLC and your business will automatically be designated a member-managed company if you do not choose otherwise. In this type of management designation every member relies on each other (and each member has the responsibility) for the overall success of the company. Member-managed LLCs are preferable when there are less members and everyone wants to be active in the running of the business.
Manager- Managed LLC
A manager-managed LLC, on the other hand, is whenonly a small, select number of peopleare designated as managers of the business. This is often when one (or two) people want to be active participants in the business and when others would rather be silent or passive investors in the business. This type of LLC structure is best used when your organization is large or complex and you require more structure and management levels in order to operate effectively. Manager-managed LLC’s are also allowed to hire managers from outside the members of the organization if they chose to do so.
What’s best for your LLC?
When choosing what option would be best for your company you’ll want to think about how you’d like your LLC to develop and function. If you expect your business to grow at a rapid pace, or it already is large and/or complex with various management levels, then it may be beneficial to hire a manger from the start and designate as a manager-managed LLC. If your business is on the smaller side--or if you’re a solo entrepreneur--and all members want to remain involved in the day to day operation and running of the business, then you may want to stay a member-managed LLC. Acost-benefit analysis (CBA) may even be helpful when making this decision.
Overall, in deciding which type of management for your LLC is best for your business, look at whether or not every member would like to have an active role in the business or you would rather designate one person to run those daily operations. Are you looking to grow your business and expand? Will your business be complex and require different levels of management? If so, you should consider filing as a manager-managed LLC rather than member-managed.
Either way by knowing what these terms mean and how they will affect your business structure you’ll be more prepared when filing your LLC Articles of Organization with your State and more confident in running your business!
THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.