When you decide to start a Limited Liability Company (LLC), there are many important decisions to make: what will your business name be? Who will be your registered agent provider? What management structure will you choose?
Many business owners opt for a member-managed LLC management structure – in fact, it is the default LLC structure in most states. Instead of manager-managed, in which hired managers oversee the day-to-day operations of your business, in a member-managed LLC, owners handle the daily tasks and decision-making. It’s more common for small business owners and entrepreneurs to opt for a member-managed LLC since it can often be cheaper and simpler to operate.
If you’re a business owner forming an LLC for the first time and and have chosen a member-managed management style, then you’ll need to understand what it fully entails. The guide below outlines the essential, need-to-know information for all LLC owners opting for this management style.
How does a member-managed LLC work?
In a member-managed LLC, the members (owners) are actively involved in the day-to-day management of the business. Decisions are made collaboratively between owners, and members typically contribute both financial capital and “sweat equity,” meaning they play a hands-on role in driving the business forward.
Pros and cons of a member-managed LLC
Before choosing a member-managed structure for your LLC, it’s important to consider both the benefits and potential drawbacks.
| Member-managed LLC pros | Member-managed LLC cons |
|---|---|
| Simplicity: Member-managed LLCs are generally easier to operate. Since the owners handle day-to-day decisions, there's no need to appoint external managers, which streamlines governance and decision-making. | Time commitment: Managing an LLC while also being an owner demands significant time and energy. This structure requires members to be deeply involved in daily operations, which can be challenging alongside other responsibilities. |
| Direct control: Owners actively participate in decision-making, giving them hands-on control over key business matters like contracts and operations. This can lead to more responsive and tailored choices for the business. | Limited expertise: Not all owners may have the skills needed to manage every aspect of the business. In some cases, hiring experienced managers could bring valuable knowledge that's missing in a member-managed setup. |
| Cost-effective: Without the need to hire and compensate managers, member-managed LLCs often have lower overhead costs. | Risk of conflict: When multiple owners are involved, reaching consensus can be difficult. Differing opinions may lead to disagreements, potentially slowing progress or causing tension. |
Ownership, profit distribution, and voting rights
In a member-managed LLC, where owners are actively involved in running the business, it’s essential to clearly define ownership stakes, how profits are shared, and voting rights from the beginning. These elements can be tailored to fit the needs of the business; for example, owners with a larger financial investment might receive a greater share of profits or have more influence in decision-making.
Documenting these details in the member-managed LLC operating agreement, along with clear decision-making procedures, helps prevent misunderstandings and reduces the risk of conflict down the line. Having everything in writing ensures transparency and keeps everyone on the same page.
When is a member-managed LLC the right fit?
How do you know if a member-managed structure is the right fit for your business? It can be a great choice for small businesses or startups where owners want to stay closely involved in daily operations. This structure is also cost-effective, making it ideal for businesses with limited budgets that want to avoid the expense of hiring managers.
Family-run businesses often thrive under a member-managed model, as it allows family members to actively participate in decisions that matter. If you're a hands-on owner who prefers to steer the business directly rather than delegate, this approach can offer the control and involvement you're looking for - otherwise a manager-managed approach may be better for you. You can learn more about this management structure in our LLC member vs LLC manager structure blog.
Start your member-managed LLC with Corporate Creations
If you're an entrepreneur or small business owner considering a member-managed LLC, we're here to help. With years of expertise in LLC formations, the team at Corporate Creations can guide you through every step of the LLC formation process, including setting up your LLC with the structure that best suits your needs. Start your business journey with Corporate Creations today.
Disclaimer: Information provided on this page is not legal or financial advice. Consult an attorney and/or financial professional for legal or financial matters.
FAQs: Member-managed LLC
In most states - including California, Texas, Florida, and New York - a member-managed LLC is the default structure unless otherwise specified. This setup is often preferred for small businesses and startups because it’s straightforward and allows owners to stay directly involved in day-to-day operations.
By default, LLCs are subject to pass-through taxation meaning profits and losses are reported on the owners’ personal tax returns. This applies to both member-managed and manager-managed LLCs, so the management structure doesn’t affect federal tax classification.
Yes, you can absolutely switch your LLC’s management structure. It’s a common change as businesses grow. To do so, you’ll need to:
- Update your operating agreement to reflect the new structure,
- Get approval from all members,
- File an amendment to your Articles of Organization with your state.
Corporate Creations can help guide you through the process of changing your LLC from member-managed to manager-managed. Contact us to learn how we can support you.
