A limited liability company, or LLC for short, is an amazing entity for small businesses.  It allows for flexibility and administrative ease.   However, there is still something that you must think through before you jump in head first and form an LLC and that is:  LLC Management.

When it comes to an LLC, it can be managed in one of two ways:  member managed or manager managed.  Now, each state has different laws when it comes to LLC management.  You need to speak with an attorney licensed in your state, but I am going to just give you the high-level basics.

The owners of an LLC are called members.  When you set up an LLC, at least a Pennsylvania LLC, the default LLC management is that of a member-managed LLC.  What this means is that the owners of the LLC make decisions on behalf of the LLC and have authority to do so, with the exception of decisions that need a majority vote.  All members participate in the decision-making process of the LLC are an agent of the LLC and have a vote in business decisions.

This is the set-up most small businesses follow when setting up their LLCs.  When doing so, the operating agreement can be a great tool to limit the decision-making of members to certain types of transactions or dollar amounts.  That is the beauty of an LLC, it is a vehicle created by contract under state law so the members can agree to most things so long as the state law doesn’t say otherwise.

Now you may be wondering when it is appropriate or when LLCs often choose a manager-managed style.  Well, I have found that this LLC management style is selected in two cases:

First, when an LLC has a lot of passive members, such as  individuals that may be investors and designated as members, but they do not participate in the day-to-day decision making of the company. Because of this, passive members tend to have less liability. In this case, it makes sense to have a manager or several managers (you can appointment a board of managers, like a board of directors) to run the business. If there are both passive and active members, an active member should be the manager.

The second scenario usually comes up with very large LLCs.  In this case, it also makes sense to select one or more managers to run the company, since it would be prohibitive to try to get all the members together to make decisions. It’s important to remember that if your LLC selects a manager, the manager has the authority to make decisions for the LLC and this person has fiduciary responsibilities. If you don’t want someone else deciding, then the members can and should retain that right.  You must be selective when choosing a manager and remember that a manager can also be a member but doesn’t need to be.  This is a common misconception a lot of clients have had.

In either scenario, you should always discuss the options with experienced legal counsel.  Doing so will ensure that your LLC is structured and managed correctly for your short and long term goals.  If you would like to discuss this with our firm, just click HERE to message us today.