2 Types of LLCs: Manager-Managed v. Member-Managed
Let’s talk about the two types of LLCs or Limited Liability Companies. First of all, Limited Liability Companies are a very flexible vehicle for doing business. They give you all of the protections from liability that a corporation gives you without many of the complexities and drawbacks that a corporation has. There are two different types of LLCs. First is called a manager-managed LLC.
Under a manager-managed LLC, one person is designated as the legal agent for the LLC. That one person is empowered to sign contracts or make promises or commitments on behalf of the LLC that are legally binding.
This is the appropriate form of LLC if there are multiple members or owners of an LLC. If you’re in business with friends or business partners, then you are almost certainly going to want a manager-managed LLC. That manager could be one of the members of the LLC. Perhaps all of the members vote and give that manager a set term. It could be a one, two, or three year term to act as manager on behalf of the other members of the LLC as a whole. Depending on how you want to operate your business, you could look outside of the membership of your LLC and hire a professional manager.
This would essentially be like hiring a CEO for your business. That professional manager would not be a member or an owner of the LLC, but they would have the legal right and duty to operate the LLC, be its agent, and be accountable to its members.
The second type of LLC is a member-managed LLC. Under a member-managed LLC each and every member has the legal ability to bind the LLC to contracts or other commitments. If you’re in business by yourself and operating your business by yourself, then you almost certainly have a member-managed LLC, although of course this is a legal video, so there are caveats to that. Which I can explain if you want to get in touch.
Typically, if there is one member of an LLC, it is going to be a member-managed LLC. Under a member-managed LLC each person has the legal right to bind the LLC to legal obligations and commitments. You really don’t want to use this form of LLC if you have more than one member because you could get a wild, wild west where you’ve got two, or three, or four members who are out running around and signing contracts on behalf of the LLC. You may not even necessarily know what they’re committing to!
So, this could be pretty dangerous if you have a multi-member LLC that is also a member-managed LLC. So, how are you going to designate whether you are a member-managed or a manager-managed LLC?
Operating Agreements & Types of LLCs
You will do that in the LLC’s operating agreement. An operating agreement is a binding contract among the members of an LLC. It’s an extremely important document that you will absolutely need to get right at the beginning.
This is not something you want to download off the internet and DIY. I can’t even tell you how many people hire us three or four years after they’ve done that in order to unwind all of the problems in their DIY operating agreement. The value of having an attorney is the advice we give you before you sign your operating agreement.
You need to understand types of LLCs, what’s in the operating agreement, and make sure that it fits the needs of how you’re actually going to run your business. We can draft an operating agreement that will give you the manager-managed or member-managed setup you need. Depending on you and your own or you and your partners personal needs and how you’re going to run your business.