An important issue in forming a limited liability company (LLC) is should your LLC be member-managed or manager-managed. So, what does member-managed vs. manager-managed mean?
First of all, the owners of an LLC are called “members.” In the “Freedom Friday” blog, you will often see the term “single-member LLC.” A “single-member LLC” has one member, or owner. Likewise, a “multi-member” LLC has more than one member, or owners. However, an LLC can either be member-managed, or manager-managed. If an LLC is member-managed, then all the members (owners) of the LLC are involved in the daily business operations of the company. If an LLC is manager-managed, then that means some (or all) of the members (owners) can be investors only, and not have any management-responsibilities (member-managed). The members of a manager-managed LLC can also appoint a third party to manage the LLC.
Member-managed LLCs are the most common, especially with single-member LLCs. This is the right choice if all of the members (owners) are going to actively be involved in the management and operations of the business. If you're starting a business with a business partner, and both of you wish to handle the management and daily decisions for the LLC, then you will want your LLC to be a member-managed LLC. Almost all single-member LLCs are member-managed LLC, at least when they start out.
Manager-managed LLCs are the right choice when one or more of the members (owners) are only investors providing financial support and do not wish to be involved in the daily operation of the company. Also, sometimes one or more of the members (owners) do not have the knowledge or experience in business to be involved in management, or simply do not want to be bothered with that role. In this type of situation, the members (owners) of the LLC will need to select a manager or managers for the LLC. In some situations, the members (owners) of the LLC can appoint a board of directors to manage the LLC, as well. More commonly, the members (owners) can appoint one or some of the members to be the managers of the LLC, and any remaining members will not have any management responsibilities. The members can also elect an outside third party non-member to be the manager or appoint a board of directors. The main reason to form a manager-managed LLC is because the members (owners) who are not managers will not have the legal ability to bind the business. This would allow the LLC to include investors without running the risk that an investor might make a poor business decision affecting the LLC and avoids legal issues down the road.
If you are still not sure if your business should be a member-managed LLC or a manager-managed LLC, it is usually safe to choose to be a manager-managed LLC. For a single-member LLC, the single member (owner) can always elect himself as the manager for the LLC. For a multi-member LLC, if all the members (owners) want to be managers, they can elect themselves as managers. It is important that the Operating Agreement for the LLC provide direction for how and when members (owners) can elect or appoint managers for the LLC, and the Operating Agreement should also provide specific details as to what a non-managing member can and cannot do.
As always, it is best to consult with a business attorney before making any of these kinds of decisions when starting your business. Many attorneys, including myself at Liberty Legal Solutions, LLC, charge a reasonable flat fee to help set up your LLC and draft your Operating Agreement. My fee starts at $500 for setting up a single-member LLC in Oklahoma. The costs of paying for an attorney when starting your business will likely save you time and money in the long run and get your business started on the right foot.
If you are interested in starting a small business anywhere in Oklahoma, or if you have a small business and you are looking to grow, please feel free to contact me at [email protected]. For more information about Liberty Legal Solutions, LLC, please visit our website http://www.libertylegalok.com.