Management Structures in a Limited Liability Company

By Heather Frances J.D.

Before you start conducting business, you need to have a management structure in place. Otherwise, your operations may become disorganized chaos before you even get the new venture off the ground. If you’ve chosen to structure your business as a limited liability company, or LLC, it can be managed by the members, managers or appointed officers.

Members

An LLC’s owners are called members. If these owners manage the LLC, it is said to be member-managed. Like corporations, LLCs can have many owners, but it is also possible to form an LLC with just one member, or sole proprietor. Such single-member LLCs can be managed by the sole member, but they may not offer the liability protection of a multiple-member LLC since some courts view single-member LLCs more critically; thereby, increasing the likelihood of the structure being considered a sham, depending on the circumstances.

Managers

If you have multiple members but want more centralized control for your company, consider the structure of a manager-managed LLC. The members in a manager-managed LLC don’t manage the details of the LLC, but appoint managers for this responsibility. This allows the members to exercise some control over the LLC without having to manage its day-to-day activities. For example, the member-appointed managers may decide on large purchases, advertising campaigns and company policies so the members don't have to make these decisions. This may be the most appropriate option when several of the LLC’s members have other jobs or manage other businesses, leaving them unable to devote sufficient time to the management of the LLC. Manager-managed LLCs may also be advantageous when members want to invest in the company without becoming overly involved in its operations.

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Officers

An LLC’s managers or members can appoint a subordinate level of managers, called officers, to manage specific areas of the LLC’s business. This is similar to corporations that are owned by shareholders but managed by a board of directors that appoints officers for the corporation. While LLCs are not required to appoint officers to manage areas of daily operations, such appointments may be particularly advantageous for large LLCs that have many departments. For example, a large construction LLC may need an officer to manage its residential construction operations and a different officer to manage its commercial division. An LLC can be structured so its managers or members appoint officers, with both members and managers eligible to serve as officers.

Operating Agreement

Requirements for formalizing an LLC vary, but most states require an LLC to file articles of organization with the state, usually the Secretary of State or other regulatory agency, and describe the LLC's chosen management structure. If you later change this structure, a simple amendment filed with the state is usually all that's required to do so. Though your state may not require you to create or file your operating agreement, it is still a good idea to create one, particularly if your LLC has many members or appoints officers with traditional corporate titles and roles. An operating agreement is a written plan that details all aspects of the management structure, ensuring it is clear and transparent for both investors and members.

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Can I Change an LLC From Members to Managers?

References

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