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Member managed LCC: what is it and when to use it?

When forming a new limited liability company (“Member Managed LLC”), it is essential to understand the different possibilities in regards to management and control. By evaluating the different options, you are better equipped to make the choice that best suites the needs of your company and its owners. Member managed LLC will be our first topic, but there are different options.

There are two options to consider when deciding on your management structure: member-managed and manager-managed. All owners of a LLC are called “members”, which is a term comparable to a “shareholder” of a corporation. Managers are persons or even other entities that are given the authority to manage the company, or stated otherwise, to run the company on a day-to-day basis. Not all members have to be managers, and managers are not required to be members. This is what a member managed LLC is.

In a nutshell, a member managed LLC is when all members participate in the running of the business and all members have authority to take action on behalf of and in the name of the LLC.

So what is a manager manged LLC?

In contrast, a manager managed LLC is when only select rather than all members, or even nonmembers, are chosen to run the business. The non-manager members of a manager-managed LLC are more or less silent partners who may be given, in the company’s written Operating Agreement, some voting rights on critically significant decisions that expressly require approval of the majority vote or even unanimous vote of the members, such as a decision to sell the company, to borrow more than a stated sum of money, or to bring a lawsuit.

Generally speaking, LLC’s default to member-managed status under state law, which means that if a manager-managed structure is not chosen and outlined in the company’s formation documents then it will be considered a member-managed LLC. Additionally, unless otherwise expressed in the operating agreement, all of the members are authorized to make decisions and enter into contracts on behalf of the company. An operating agreement is a contract between the members and, in the case of manager-managed LLCs, the members and managers, and the LLC.

Even though member-managed is the default, there are many reasons to structure the company as manager-managed.

After all, if desired, all members can be managers and yet there is the flexibility to not have that be the case. The most common reason is because the company will have “silent” or “passive” members who should not be involved in the day-to-day operations and should not be given authority to bind the company. For example, a company may have one or more “silent” investors who provide capital but choose not to participate in the day to day operations of the company; in this situation, it makes sense to have a manager-managed LLC where only the managers who are selected by the members are running the business.

Another reason for the selection for a manager-managed LLC is when a founder has an idea for a company, but is unable to execute her vision on her own and desires to utilize non-member experts to help run the company. Additionally, if a company knows it will be seeking outside investors or will be providing sweat-equity to employees but does not want to empower those investors or employees to run the company or act as an agent of the Company, then it makes sense to be manager-managed even if all of the initial members are going to be the initial managers.

In order to make the best choice when you set up your new LLC, seek competent legal counsel to help you consider not just the immediate needs of your company, but instead to explore your long term vision and help you select a structure on which you can build the company of your dreams. Contact Landwehr Law Offices for your business assessment today.