When you form an LLC, you’ll fill out Articles of Organization and register them with the business division of your Secretary of State. This document asks some basic information about your business, including its name, address, type of business, and other details of that nature.
It also asks whether your LLC is managed by the managers, or by the managing members. But what does this mean? How do you know which to select?
Your decision comes down to your preferred control structure of the LLC.
First, it helps to understand that members of an LLC are analogous to shareholders of a corporation—they are the owners of the business, and they are the ones who vote and make decisions.
But for many small businesses, there isn’t a roomful of members to appease; there’s typically just you and a partner or small group of people—or perhaps just you. What does it mean to have a member-managed or manager-managed LLC for a small business?
A member-managed LLC has shared decision-making power for all owners.
This kind of ownership structure is used when all of the owners share in the management of the business equally. No one’s vote carries any more weight than another member’s.
There are many situations where this works wonderfully. As Megan Hughes of US Tax Aid explains:
A member-managed LLC is a great choice if you’re a single owner business, and you don’t anticipate every having people come in as silent, non-participating members. It can also work for a multiple-owner business, again as long as everyone is prepared to participate equally, and you don’t anticipate bringing in non-participating investors.
But it is not for every kind of business.
A manager-managed LLC reserves the decision-making power only to select individuals.
Sometimes, you might decide to keep all of the power for yourself and limit the other co-owner or owners in their ability to direct the company.
Here’s a common example. One person might decide to start and run a business, but another person might provide the funding for that business in exchange for ownership, but without the desire (or ability) to influence day-to-day affairs.
In this situation, one person is able to make decisions that another person is not. It all comes down to how much you as a business owner want to share control.
What about the division of profits?
The owners of a corporation, called shareholders, receive corporate profits according to the number of shares they own—a widely known fact.
But an LLC (of either management type) differs from a corporation in this respect: profits can be distributed in any ratio accepted by the members, regardless of what percentage of ownership they have.
This is especially handy in the situation described above, where one person does the hard work of running the business and the other simply ponies up the cash. Even if one person invested 90% of the startup capital, as long as both people agree to it, they could arrange for the silent investor to receive only 20% of the profits, while 80% goes to the person whose job it is to manage the company—or whatever other division of profits the owners think appropriate.
How have you organized the control structure of your LLC? How did you come to that decision? Tell us your story in the comments below!