Business Law Series: LLC Management
When you form an LLC, you will need to decide how your LLC will be managed. You can check out this prior Business Law Series post with instructions on how to form an LLC.
There are two different possible management structures for LLCs. The first management structure you can choose is member-managed. In this structure, all the members (owners) participate in running the business.
In the alternative, you can elect to form a manager-managed LLC where only designated members, or certain nonmembers/outsiders, or a combination of members and nonmembers are given the responsibility to run the business. The other members in a manager-managed LLC are passive investors who are not involved in business operations.
In practice, most LLCs are member-managed. All members share responsibility for the day-to-day running of the business. I believe this structure is more common because many LLCs are small businesses and by nature the members will be the ones running the business.
However, members often want to remain anonymous (LLC records filed with the Secretary of State are public record) and they do not wish for their information to show up in a search of the business. Often, in this scenario manager-managed will be the best option for those members.
In the state of Washington, LLCs are member-managed by default. Therefore, if you do not designate in your formation documents or in the LLC Operating Agreement that the LLC will be manager-managed, the default is for member-management.
In some situations, a manager-management structure may be preferable. The most common example is when some members only want to be passive investors in the business. These owners often feel more comfortable if the LLC delegates management responsibilities to one or more other members (or nonmembers).
Two other common situations where LLC owners may prefer a manager-management structure are: (1) when the business or ownership is too large or complex to efficiently allow for sharing management among all members; or (2) when some of the LLC members are not particularly skilled at management. In these situations, an outsider is usually hired to manage the business. This can be a great way to ensure more competent business management.
Document your choice
Whether you choose for your LLC to be member-managed or manager-managed it is important to document your choose in the LLC Operating Agreement and to specifically set forth rules and guidelines for the management of the LLC.
If you have questions about the management structure of your LLC or need assistance in documenting your LLC, please contact me!
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only, and should not be construed as legal advice from Leos & Gilkerson, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a licensed lawyer.