There is always confusion regarding the structure of LLC, it often arises because of the argument of Manager Managed LLC vs. Member Managed LLC. This is because LLC (Limited Liability Company) is a popular choice for businesses with small operations. Entrepreneurs, who have just started their own business, generally opt for LLC as their business structure. The reason behind this choice is LLC business structure enables you to combine the benefits of a partnership or sole proprietorship with desirable elements of a corporation. It should be noted that LLC doesn’t require a board of directors for the decision-making process and there is no requirement of the voting process through board members to specify the direction of an LLC. However, a business still needs key decisions on a day-to-day basis to move forward.
For this purpose, owners who are referred to as members can either make decisions on their own or designate a specific person termed as the manager to hold the responsibility. Whatever the case is, you need to specify it in the structure of your business, and it helps you make things a lot easier for everyone involved in the process. However, many people find themselves confused because they don’t know the key differences. We have made a detailed guide to help you understand Manager Managed LLC vs. Member Managed LLC. Read on to know further details:
What is Manager Managed LLC?
This term may sound awkward because of the redundancy, but it actually makes things easier for people running an LLC. In such a business structure, members or owners opt to stay passive members and only give their input for investment. They designate a person as the manager who is capable of running day-to-day operations of the LLC and making key decisions for the betterment of business on his/her own. This manager can be a member as well. However, generally, a non-member is assigned the role of a manager. Specifying the structure of an LLC as a Manager Managed LLC works better for a larger business because this structure makes the hierarchy clear. The designation of a member is carried out by the voting of members. It should be noted that a person will be only designated as a manager if the total votes in his favor combine to be more than 50% of the total votes.
How a Manager Managed LLC Works?
As we all know in Manager Managed LLCs, a manager who can be a member or non-member runs day-to-day operations of a business. A business with small operations may rely on just one manager, however, if the scale of operations is larger, members can bring in a team of managers to run the operations of the company. If a manager happens to be a member as well, he/she is entitled to get the share earnings and wages as a manager.
What is Member Managed LLC?
Any LLC is by default considered as a Member Managed LLC because the members of an LLC have the right to make decisions for the sake of the betterment of the business. An LLC will be considered as a Member Managed LLC until or unless its members designate a particular person as the manager of the organization and clearly specify it in the structure of the business. In the case of a Member Managed LLC, every member is authorized to make important decisions, manage day-to-day operations, and sign contracts.
How a Member Managed LLC Works?
When an LLC is specified as a Member Managed LLC, the decision-making process is carried out by all the members of that limited liability company. Each member holds the percentage of ownership of LLC and is authorized to make a vote on important business decisions. Every member of an LLC is fully authorized to make decisions on behalf of the company, until or unless these decisions are about business contracts or loan agreements. In such a scenario, decisions are made on the basis of the agreement of a majority of members.
Operating Agreements of a Member-Managed LLC:
Operating agreements play a crucial part in specifying the issues that require the voting process and the votes that require unanimity. Moreover, an operating agreement of Member Managed LLC also specifies the roles of various members of the limited liability company. Moreover, it also establishes the structure of a business and makes it easier for everyone to understand the structure of a particular Limited Liability Company.
Pros and Cons:
Manager Managed LLC vs. Member Managed LLC
To understand the Manager Managed LLC vs Member Managed LLC completely, it is necessary to understand the pros and cons. Hence, we have made a list of advantages and disadvantages in both cases.
Pros and Cons of Manager Managed LLC
Here are some pros and Cons of Manager Managed LLC:
Pros:
Easy affair for members as they play their role as passive investors.
Quick Operations are possible
Centralized decision-making capability.
Makes the hierarchy clearer
Cons:
A typical manager may lack in understanding business as good as owners.
Owners don’t take part in management decisions.
The operating agreement document should clearly state the authority of the manager.
Pros and Cons of Manager Managed LLC:
Here are some pros and cons of Manager Managed LLC:
Pros:
All members take part in the decision-making process regarding the management of the company.
It is a fairly less complicated structure; it is especially good for businesses with small operations.
A great choice for retail businesses.
Cons:
Management can be an extensive job that will take a fair part of their time away from key business decisions.
This structure may make it challenging for the members to raise money for investment.
Manager Managed LLC vs. Member Managed LLC: Which is Right?
The choice depends solely on the specifics of your business. If it is a company with small business operations and 2 or 3 co-owners or members, then specifying it as a Member Managed LLC will work better for you. However, if you have a larger company with plenty of day-to-day operations and several owners then going with Manager Managed LLC is right to centralize decision making and make the hierarchy clear.
If you are still confused about Manager Managed LLC vs Member Managed LLC then consultation from business litigation attorneys would come in handy for you.
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