When it comes time to form a limited liability company, or "LLC", you will need to make certain decisions about how that entity will be managed. One of the more important decisions is whether that entity will be a member managed LLC or a manager managed LLC. That decision will primarily be a function of the level of involvement in the business by its owners.
Advantages of a Member Managed Limited Liability Company
In a member managed LLC, all of the company's owners will have an active role in managing the company. A smaller, closely-held LLC that has a relatively small number of owners is more amenable to being member managed. If an LLC only has three or four owners, for example, those owners can effectively manage the LLC through cooperation and mutual decision-making. An LLC owned by twenty or more people poses a more cumbersome management problem if all of those owners are expected to participate in every management decision that the entity needs to make. Member managed LLC's typically have lower administrative costs due to their simpler management structures. Liability and worker's compensation insurance costs might also be lower in a member managed LLC, depending on the employment status of the members who are actually working within the entity. Business insurance brokers can provide specific insurance information and cost differences for member and manager managed LLC's.
Advantages of a Manager Managed Limited Liability Company
As noted, manager managed LLC's are ideal when an entity has a larger number of owners. Manager managed LLC's are also a better option when one or more owners wants a passive role in the entity, or where the entity is financed by outside investors who do not desire or intend to actively manage the business. Investors, in particular, will want assurances that their money is being overseen by a small, dedicated management team and not a large, amorphous group of owners. Further, some business startups that have owners with good operational skills but weaker management ability will be well-served by hiring professional managers.
Limited Liability Operating Agreement
In both cases, whether you should decide to start your business as a member or manager managed limited liability company, the decision to do so generally is memorialized in the LLC's operating agreement.
Plan for Growth
A closely-held LLC that initially has just a few owners and that initially elects to be member managed can plan for its growth by adding provisions to its operating agreement to address whether and how the entity can transition from member managed to manager managed. The members, for example, can specify that a simple or super-majority of member votes will be required to change a management structure. If the members subsequently follow this procedure and decide to change to manager management, they will need to amend the operating agreement.
Prepare for the Possibility of Downsizing
In the contrary, an LLC that is downsizing or that is consolidating its ownership in the hands of a few members can also do this process in the other direction and transition from manager managed to member managed. Having the right language in place in your operating agreement from the onset that would allow you the ability to transition from a manager managed LLC to a member managed LLC could wind up saving much hassle and debate if it ever winds up happening to your company.,
The limited liability company is the structure of choice for most new businesses. The decision of how the business is structured is an important decision that business owners should carefully consider before deciding to open up an LLC. Business owners should take the time to understand which option, i.e. member managed or manager managed, is better for them and their business operations. Contact us today so we can help you make the decision that best fits your business.
Julian Cordero is an Attorney, Music Producer, and Entrepreneur. Oh and he blogs too! Julian is licensed to practice law in New York and is the Managing Member of Cordero Law LLC, a New York City based law firm focusing on Business Law, Entertainment Law, and Intellectual Property