We often assist clients with forming new corporations and limited liability companies. One of the most common questions asked when discussing a new limited liability company with our clients is whether their LLC should be member-managed or manager-managed. So, what is the difference?
When you form an LLC, you have members, not shareholders. The members each own a percentage of the company.
If there are only a few members and they are all going to be empowered to enter into contracts and handle other matters for the company, then you want to be member-managed. Keep in mind that, in a member-managed LLC, all members participate in the decision-making process of the LLC. Each member is an agent of the LLC and each member has a vote in business decisions.
However, if one or two members are going to be the ones who handle legal and financial matters, and the other members are going to be passive, then you should be manager-managed (“internal manager”). Manager-managed LLCs relinquish the authority of the members to the manager or managers, who become agents of the company. Also, an LLC can be managed by someone who is not even a member (“external manager”), and that is always going to be a manager-managed LLC.
It is crucial to determine who will manage your LLC before you begin operations. A well-crafted operating agreement should specify who will manage and how decisions will be made. Too often, business owners create their LLC without the assistance of an attorney and skip the step of creating an operating agreement. This can lead to legal difficulties down the road. It is better to have a strong legal foundation right from the beginning.