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Designing Your LLC: Member-Managed vs. Manager-Managed

Jurisdictions across the United States added limited liability companies (LLCs) to their business and corporations codes in order to provide many of the benefits of incorporation – while giving entrepreneurs the flexibility to design entities that met the particular needs of their business models and ownership structure. To that end, most states give LLC organizers a modicum of freedom when it comes to defining the organizational structure of their proposed businesses.

A proper operating agreement is crucial not only to defining the structure of a business, but also to maintaining the liability protection that the LLC form affords. While LLC operating agreements can be customized in many ways, one of the most prominent distinctions is between the member-managed form and the manager-managed form:

  • Member-managed – This type of LLC functions more like a partnership. Members – those who hold an ownership interest in the company – directly manage the enterprise and participate in its day-to-day operations. This type of structure allows owners to maintain close control but may become unwieldy in companies with a large number of stakeholders.
  • Manager-managed – This type of LLC functions more like a corporation. Members choose a manager to act as a fiduciary for the company and to directly manage its operations. The members then settle into a role that somewhat resembles that of shareholders, reserving authority over certain major decisions but largely delegating the minutiae to the manager. This type of structure may be more appropriate for companies with a large number of members, as well as for those in which the members prefer to be passive investors whose contributions are largely limited to their capital investments.

While boilerplate documents and do-it-yourself startup services are prolific across Minnesota, they are almost never sufficient for serious business enterprises. By consulting with an experienced Elk River business organizations lawyer, you can ensure that your new venture is built to last and provide ample returns. Furthermore, you can avoid the disputes and other problems that an ambiguous operating agreement often brings.