Reading... Member-Managed vs. Manager-Managed LLCs
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Member-Managed vs. Manager-Managed LLCs

When setting up a business, you do not need to incorporate as a corporation if you do not want to have all of the formalities associated with a corporation. However, you are still able to benefit from most of the protections of a corporation if you choose to incorporate as a limited liability company (LLC). When you choose an LLC as your business entity, you have a lot of flexibility. Be it a single-member LLC or a multi-member LLC, in either case you have two options for management: member management and manager management.


Before You Start a Business

Before you start a business, you should have researched all licenses and permits you need for the type of business you will be running. You should apply for these after you create your LLC so that you are sure the business name you choose is available.

You should also have a business plan. Even small, family-run companies should have a business plan. The plan outlines the day-to-day operations of the business, financing and marketing strategies, and more. If you need a loan to get your business up and running, the loan officer will give your application more consideration if you have a business plan.

Single- vs. Multi-Member LLCs

A single-member LLC sounds just like what it is: there is only one owner, manager, and member. Choose any title you prefer and enjoy the freedom of little formalities for your business entity. A multi-member LLC has more than one member or manager.

If you have a single-member LLC, you also have another benefit: taxation. A single-member LLC is usually a disregarded entity. This means that you avoid the double taxation that corporations and multi-member LLCs are subject to. As a single-member LLC, your business taxes are filed on Schedule C of your personal tax return.

The Management Structure

Once you choose whether you are going to be a single- or multi-member LLC, you then have to choose which management structure you prefer. The two forms are manager-managed and member-managed LLCs.

  • Member-Managed LLC – The member-managed LLC is more common, and many states default to this structure. In a member-managed LLC, all members (owners) are involved in decision-making. If you are a single-member LLC, you—the owner—are the manager. Major decisions, such as loans and contracts, require a majority of the vote for approval. Member-managed LLCs are also less expensive to operate, thus they are popular choices for small businesses. This structure is also common for owners of businesses who actually work in the business. These owners contribute by making products or providing services themselves. If you prefer to work directly with your customers, a member-managed LLC is the structure that you should consider.
  • Manager-Managed LLC – If you choose a manager-managed structure, formally create a manager role, which is separate from the ownership of the LLC. The owner has responsibility for high-level decisions while the manager(s) are able to do things that are required to run the business, including, but not limited to, hiring, firing, entering contracts on behalf of the business, and writing checks. The owner might have the sole authority to merge or acquire another business, get a loan, and process other high-level transactions. If you choose to have a manager-managed LLC, you must specify this in the articles of organization and the LLC operating agreement. In a manager-managed LLC, managers may be members or non-members and are usually chosen because of their good business sense. A manager-managed LLC is a good option for an LLC with several members, with some members who want to invest only and not be involved in any decision-making processes. The dedicated manager members do not need to get the approval of the investors to make decisions. These members are generally well-versed in business practices. The manager-managed structure also allows those who wish to be owners but do not have any business experience to be a member. This is a good strategy since banks are more willing to give loans to businesses that are run by experienced businesspeople. The manager-managed structure is also great for businesses with many members. It could be difficult to get people to agree on what is best for the business if too many are involved in the decision-making process. Thus, members still have the benefits of being a member, with the exception of making business decisions. A family business also benefits from a manager-managed structure. The parents are able to bring their children into the business without giving up any control to the children; plus, you may have family members who wish to be involved with growing the business, but do not wish to make any of the major decisions.

Director-Managed LLCs

Some states also provide for the third type of structure: the director-managed LLC. Tennessee is one of those states. In a director-managed LLC, the board of directors has the power to make the decisions for the business. If the LLC has one director, that person shall make the decisions. If the LLC has several directors, then a majority is required to make any changes and/or decisions, including adding and removing directors. A director does not have to be a member of the LLC, thus you are able to have decision-makers who are not owners.

Certain decisions do require a unanimous vote by the members, including the following decisions:

  • Amending the operating agreement if the LLC documents do not state the method of amendment
  • Amending the articles of organization
  • Making a contribution under Tn. Code §48-249-302(a) (liability for contributions)
  • Making a contribution or returning property or money paid in violation of Chapter 249 of the Tn. Code
  • Admitting a new member
  • Using property belonging to the LLC to pay subject to a charging order
  • Electing to be governed by Chapter 249, if the LLC was formed before January 1, 2006

The Operating Agreement

While an operating agreement may not be necessary to set up an LLC, it is advisable to have one, even if you are a single-member LLC. If you do choose to eliminate the operating agreement, check the rules for your state before doing so. Some states may require an operating agreement.

The operating agreement lets everyone know the rules of running the business and could stave off arguments later on. For the single-member LLC, the operating agreement ensures that you have crossed all the Ts and dotted all the Is. It also provides evidence of separation of your personal and business affairs. In the event that you are sued and cannot prove that you kept your business and personal affairs separate, the person or company suing you could pierce the corporate veil and go after your personal assets. Thus, the operating agreement serves to prevent you or other members from becoming personally liable for company debts.

Documents Related to the Operating Agreement

In some cases, you may need the following additional documents that are related to the operating agreement:

  • LLC Operating Agreement Amendment – If you need to update the operating agreement, you will need an LLC operating agreement amendment. The amendment not only documents the changes in the event that you have a problem with another member later, but it ensures that your LLC operates in a smooth manner and stays compliant. If you add or remove managers or members, add new terms, replace terms that already exist, or correct an error in the operating agreement, you should complete an operating agreement amendment.
  • LLC Operating Agreement Addendum – If you are simply adding new terms to your operating agreement, you should complete an LLC operating agreement addendum instead of the amendment. As you make changes to the operating agreement, add the new terms to the original agreement with an amendment so that your LLC's procedures and rules are always up to date.
  • LLC Membership Admission Agreement – An LLC membership admission agreement documents the addition of new members as owners. When you have an admission agreement, you have officially added a new member or owner. This agreement notifies the rest of the members that the decision is formal, and it also notifies the new member that he or she must abide by the operating agreement that was already in place prior to his or her addition.

Creating a New Limited Liability Company

When you create an LLC, complete the forms from your Secretary of State. You will need the company name; the members' names, addresses, and contact information; the type of business that you will be conducting; and a registered agent.

Before you create a new LLC, check with the Secretary of State to ensure that the name you choose has not been taken already; you cannot have a name that is the same as another company's name. Register your name separately, if your state requires that. In many states, when you register the LLC, the state automatically registers your business name.

Names and Addresses

Be sure to have all members' legal names, addresses, phone numbers, and email addresses. If a member is another company, you will need the name of the company and the company's address and contact information.

You may also need the company's registration number from the Secretary of State and its Employer Identification Number (EIN) from the IRS, depending on your state's requirements.

The registered agent is a person or entity that is authorized to accept legal documents on behalf of the company. It could be yourself, another member, an attorney, or a financial institution, or you may use a company that provides registered agents. This is common for foreign—out of state—filings. Not only will this person receive any legal documents that may be served on the company, but he, she, or the entity will receive all communication from the Secretary of State regarding your filing.

Once you have completed the documentation, upload or mail it to the Secretary of State.

The Employer Identification Number (EIN)

Once you create the LLC, copy the registration number from the Secretary of State. Then, visit the IRS website to apply for your Employer Identification Number (EIN) and follow the prompts for the online process. At the end of the process, you will be able to have your new EIN forwarded to you by regular mail or you may download a PDF with your EIN number.

Additional Licenses and Permits

Apply for any other licenses and permits that your city, county, and state may require. If you are selling retail, you will also need a sales tax number from the state. Different types of businesses may need different licenses and permits, though almost every city requires an operating permit to run a business.

How LegalNature Can Help You with Your Legal Form Needs

LegalNature can help you with all of your legal form needs. Let us help you get started today. Click here to create your LLC operating agreement now.

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