Starting a new business can be confusing. After all, there are so many formalities one needs to take care of during the entrepreneurial journey.
Once you have decided to form an LLC, the next big decision you’ll have to make is – figuring out the right management style for your company.
This is one decision that you don’t want to take in a hurry. After all, the management style plays a major impact on the success of your business.
Speaking of LLC Management types, you have two options before you – to go in for a Member-Managed LLC or a Manager-Managed LLC. So, what do these terms mean? And, coming to the more important question – which one is the right fit for your business?
Spend some time in getting your head around seemingly-complex business jargon, and it will make the process of doing business, a breeze.
Who is a member in an LLC?
In LLC terminology, people who own the business are referred to as “members.” An LLC can be owned by a single person or more than one person. When the LLC has a sole owner, it can have only one member. On the other hand, when there are multiple owners, the LLC automatically has multiple members.
First things first,
What’s the Primary Difference between Member-Managed LLC and a Manager-Managed LLC?
In a member-managed LLC, the daily operations of the business and the overall decisions are done by the members (aka owners) of the LLC.
On the other hand, in a manager-managed LLC, the operations and decisions are done by an appointed manager. This manager can either be a member of the LLC or a third-person.
When to Choose the LLC’s Management Style?
You’ll have to make this important decision before you begin operations of your LLC. The operating agreement you submit needs all details about your LLC – including who will manage it. Don’t wait until later to decide on the management style, as it could lead to legal difficulties.
Can you Change the LLC’s Management Style Later on?
Yes. You can change your choice later on (even years down the line), by amending the Operating Agreement. This change needs the approval of the LLC’s members.
Member-Managed LLC – When it Works and when it Doesn’t!
In a member-managed LLC, all members are involved in the decision making processes as well as operations. This is a good method to proceed when the members are a tight-knit team and want to be actively involved in the growth of the business and share the same vision.
All members have an equal say and share equal responsibilities. There’s no finger-pointing if something goes wrong.
When everyone gets a say in the decision making, disagreements crop up often, and it becomes difficult to arrive at a unanimous decision. This makes it difficult to take the business to the next level.
Manager-Managed LLC – When it Works and when it Doesn’t!
In a manager-managed LLC, the business appoints managers (an individual or a team) to oversee the day-to-day operations, as well as, to take responsibility for all decisions. This method is usually preferred, when the LLC has several members, and it would become difficult for business operations for all of them to get involved.
The manager can either be a member or a non-member (chosen for his managerial skills).
The manager is someone who has either experience managing the business or has the required management skills. This streamlines operations and takes the business on the right trajectory.
Additionally, if you have angel investors in your LLC, then you can opt for this model. This way, your investors remain, passive members, while you get to manage the business on your terms.
Some members (even though they agreed to this management style) may feel left out or powerless when they feel that the business isn’t heading the way, they wanted.
Here’s an example for when the manager-managed LLC is the right option.
Say, a business is co-founded by three friends, two of whom were involved in the product manufacture, while the third person, was responsible for meeting investors and funding. Then, it makes sense to appoint the third co-founder as the manager, and the rest two focus on optimizing the product lineup.
How to Choose the Management Style of the LLC?
Generally, businesses opt for a member-managed LLC, if it’s not feasible for all members to be involved in the operations, or when a few members want to remain just as investors in the firm.
However, No one answer fits all. All businesses are unique. Here are a few questions to ask to figure out the right answer.
- Do all co-founders want to be involved in the business? Or do some members want to remain just investors?
- Do all owners of the business have the skills to manage it? Remember that different people bring different skills to the table. Some may be good at the design table, while others are better at people-facing tasks and so on.
- Do all members share the same goals and visions for the business, or is there a potential for frequent disagreements?
- Will disagreements lead to confrontations and deadlocks? Or will they be able to resolve issues smoothly? What’s the dynamic quotient among the owners?
- Do you have angel investors?
Deciding the right style of management plays a crucial role in the success of your business. So, get all the members together, discuss the pros and cons to find the right solution that is the perfect match for your specific business requirements.
If you’re still not sure, “which is the right option for your business?”, reach out to professionals who can run the pros and cons of each management style with you, and help you take the right decision.
Last Updated: 27/11/2018