Member Managed vs Manager Managed LLCs
When you form an LLC in Nevada, you’re asked whether the entity will be Member-Managed or Manager-Managed.
The owners of the LLC are called “members.” As owners, members have broad discretion to run the company any way they see fit, restricted only by terms outlined in an operating agreement. For Member-Managed LLCs with no Operating Agreement, the members can do pretty much anything they please with the company. This is one of the many reasons you should have an Operating Agreement. In a Member-Managed LLC, each Member has a say in the daily operations, to the extent of their ownership interest and the amount of consent required for those decisions. If your company will have only a small number of members, who will all participate in the daily operations of the company, and who are all reachable for votes and for recording their consent for decisions, then a Member-Managed LLC may be right for you.
Sometimes, members want to take a more passive role, allowing someone with more management or industry experience handle the day-to-day operations. In a Manager-Managed LLC, a Manager can be appointed (who doesn’t have to also be a member) to be “boots on the ground” while the other members go about their lives. This is particularly helpful where a member has a day job and can’t commit the time to running the LLC and even more helpful where the members have little to no business experience and really shouldn’t be relied on for daily decisions. This structure also makes sense if you have a lot of members and obtaining the consents needed to make decisions is unduly burdensome and slows down the company. We’re working with a client now who wants their kids to be involved in the company, but not that involved, so the Manager-Managed structure allows the kids to have an ownership percentage without really sitting at the decision-making table.
Your Operating Agreement can outline the actions a Manager can take without vote of the members, and the actions the Manager can’t take without consent of the members. Usually, the Manager can make decisions as if he/she were the sole owner of the company, but can’t make certain significant decisions without unanimous consent of the members. These “significant” decisions often include adding new members, changing the ownership percentages, modifying the operating agreement, or selling the company, but the Operating Agreement can be modified according to what works best for your operations.
Keep in mind that because the Manager isn’t necessarily an owner of the company, you may need to supply a copy of your Operating Agreement or a company resolution to prove that the Manager has the authority to take the action he/she is trying to take. As an example, local licensing bureaus and banks will want to make sure the Manager has the authority to apply for licenses or open a bank account and will look to the Operating Agreement for verification.
One other potential benefit of a Manager-Managed LLC is that, at least in Nevada, only the Manager(s) name appears on the entity record with the Secretary of State. This provides a little bit of anonymity for a member who wants to remain in the background.
Regardless of the type of LLC you choose, you should always have an Operating Agreement drafted by a competent (human) business attorney. As we’ve said before, partnering up with someone in business is like getting married; your Operating Agreement is your pre-nup.