When starting an LLC, you have many decisions to make. One of the most crucial decisions is whether to let owners manage the day-to-day operations or hire a professional manager. This decision will impact your business and have significant consequences down the line. Let’s look at when each type of business structure makes sense, and the pros and cons of member managed vs manager managed LLCs.
What is a Member Managed LLC?
Member managed LLCs are those where the members (owners) make most of the day-to-day business decisions. This arrangement can be more informal than a manager managed organization, giving owners more control over how they run the business.
Most LLCs operate as member managed. The main benefit of this type of structure is that it can be less expensive and easier to set up and maintain than a manager-managed LLC. Let’s get into the nitty-gritty of how member managed works vs manager managed!
Daily Involvement & Understanding of Your Business
As a member managed LLC, you involve yourself in the daily activities of the business, whether or not you run all of it. You understand the daily happenings of your business, even if you have a partner.
For example, your partner may handle social media, your website, SEO, blogs, and online customer service. You may run the actual customer-facing business, such as a clothing boutique or coffeehouse. Your responsibilities may include ordering more inventory, contracting with other vendors, and hiring employees to run the store you manage.
However, if you hire others to manage these duties, your day-to-day business knowledge may fade, and you may become increasingly out of touch with what your managers do daily.
Simple Management and Operating Agreements
Using the example above, you each handle a large portion of the day-to-day business, so your business structure is simple. Your management and operating agreements are simple compared to a company with professional managers who run the operations.
As a member managed business, the North Carolina Secretary of State recommends you hold an operating meeting to review your Articles of Organization before starting your LLC in North Carolina.
As you write your Operating Agreement together, you’ll also need to:
- Designate Your Members (unless already listed in the Articles of Organization)
- Note the beginning and end of your fiscal year
- Write out who has the authority to handle the LLC’s banking
- Consider who has the authority to make contracts
- Consider who handles which types of business decisions
- Set up checks and balances to protect you both
- Decide how you will be taxed (1)
With a member managed LLC, writing your operating agreement and handling the above issues is much easier. You can start up quickly with fewer procedural headaches and meetings.
However, there are cases where you could benefit from a manager managed situation. Perhaps you have grown children you’d like to bring on as member investors. They implicitly trust you and your partner to handle the business’s day-to-day operations since they worked for you while growing up. In this case, it might make sense to give grown children member status in your LLC while you and your partner handle the daily management.
Contacting an experienced business attorney is always helpful when writing up Articles of Organization or Operating Agreements. A knowledgeable attorney can help you see more clearly how to incorporate checks and balances to keep the business running smoothly and hold everyone accountable for their role in the LLC.
Efficient Operation of Your Business
With multiple members and managers, your organizational structure becomes much more complicated.
As a member managed organization, you and your partner make all the decisions. You both clearly understand your responsibilities and how to handle your respective roles. You trust each other to make sound business decisions in your distinct areas of expertise. You may often talk and ensure you’re on the same page, but with only one other person involved, you’re meetings are generally not long or overly complicated.
Let’s say you and your partner in the above example decide to replace your positions with 2 managers who will handle your previous roles. You now have 2 managers and 2 members.
- Who has the authority to make the day-to-day decisions?
- How much money does the manager handle on a daily basis?
- Do managers have direct access to the bank accounts?
- Do you need new bank accounts for your LLC savings now?
- Which decisions can managers make without discussing the issue with the members?
- When will you have meetings to discuss your business and go over what is happening?
- How will you make time to oversee the business and ensure your managers are acting correctly?
You can see how your Operating Agreement could change quite a bit with a manager managed LLC. Your day-to-day involvement would drastically change. As members, you may no longer be the ones making the managing decisions for your business. With more people involved, you will have more meetings and discussions about decisions and how the company runs.
In addition, you’d need to reassess how you file your taxes as a manager managed LLC. And you’d need to file taxes documents and payroll for your new professional managers.
A manager managed LLC lacks efficient decision-making unless the members fully trust the managers.
Bring on Passive Investors More Easily
Because you are actively involved in your business as member managers, you can quickly bring on passive investors as members who do not involve themselves in the company’s day-to-day running.
Investors will not as quickly want to invest in your LLC if you have a professional manager or managers. They would be investing in your managers more than you and your partner, so you would need to show how successful and dependable your managers are. You would also need to prove that your bottom line stays consistent and that you are a solid investment.
Tax Advantages and Disadvantages
Member managed LLCs may also offer some tax advantages, as the IRS views member-managed LLCs as partnerships or disregarded entities rather than corporations. You can also elect for S-corp tax status as a member-managed LLC.
LLCs are “pass-through” business entities. Your LLC doesn’t pay federal taxes. Instead, profits and losses pass through to the members. Members pay taxes on their individual tax returns at their own personal tax rate and generally also pay self-employment taxes.
Consulting with your business attorney can help you determine the best Federal tax structure for your LLC, whether a sole proprietorship (disregarded entity), Partnership, or S-Corporation. Your state tax structure is also a complex issue that requires an attorney to understand since it usually differs from your federal tax designation.
You might need to consider securities procedures if you choose to form a manager-managed LLC with multiple members. “Membership interests in a manager-managed LLC are sometimes classified as securities because non-managing members (owners who don’t manage the company) are likely investing their money in a business in which they’re not actively participating.” (2)
However, as a member-managed LLC, you may not be subject to some of the taxes that corporations or manager managed LLCs must pay. If you’re a non-managing member in a manager-managed LLC, you may not face self-employment taxes since you’re not actively participating in the business.
When making the decision of member managed vs manager managed LLCs, there are a few key things to keep in mind. First, consider your role in the business and how much time you’re willing to commit to managing it. If you’re not looking to be as hands-on, then a manager managed LLC may make more sense. You’ll also want to consider the tax implications and whether or not you wish to bring on passive investors.
A member managed LLC may be right for you if:
- You want to avoid having to file as a corporation
- You want to have the ability to bring on passive investors more easily
- You don’t mind being actively involved in the management of your business
A manager managed LLC may be right for you if:
- You want to ensure that there is a clear line between managers and members
- You’re looking for some tax advantages as a non-managing member
Ultimately, it’s essential to choose the business structure that makes the most sense for your business’s unique situation. Talk with an experienced business lawyer to get professional advice specific to your business before making any decisions.
We Can Help
At Hopler, Wilms, and Hanna, our experienced business attorneys in North Carolina can help you form your LLC and choose the management structure that makes the most sense for your business. We can help you see clearly whether a member managed vs manager managed LLC is right for your business.
We work with companies and corporations across our state and would be happy to talk with you about any questions or concerns you may have when starting your business! Contact us today to schedule a consultation and find out how we can help.