Did you know that when you form a limited liability company (LLC) you can choose its management structure? There are three types of management structures available to individuals that incorporate as an LLC.
- Single member LLC
- Member managed LLC
- Manager managed LLC
What’s the difference between each management type? How can you determine which structure is best for your specific LLC? Let’s take a closer look at these three options and the benefits they provide their owners (or members, which is the proper name for owners of an LLC).
Single member LLC
The greatest difference between a traditional LLC and a single member LLC is in the entity’s name. An LLC was initially created to replace standard partnerships. The entity formation provides its members with liability protection. This creates a separation between personal and professional assets. In the event of an unforeseen circumstance, such as a lawsuit, it would not impact the personal assets of an entrepreneur, like their car or home.
In a single member LLC, only one member may run the business. Other LLC management structures, like manager managed and member managed, allow more than one member to operate the company.
Do you feel like a single member LLC is the best fit for you to incorporate your business? Every state in the United States recognizes single member LLC formations at the state level, so you may incorporate in all 50 states. This process does not differ all that much from forming an LLC. A member may file an LLC application, along with their Articles of Organization, and pay a filing fee to the Secretary of State. Remember that your Articles of Organization will ask you to list all of the LLC’s members. Since you’re filing as a single member LLC, you will only need to list yourself as the LLC’s sole member.
Remember that as a member you must be able to create and maintain proof of the single member LLC’s existence. The most common way to do this is to create an operating agreement for your LLC. This is a document that defines how the LLC is run, the rights and responsibilities of its member(s), and rules that detail how the business will be dissolved and the process for new members that may join or exit the LLC.
Member managed LLC
A member managed LLC has multiple members (at least two) running the business and making decisions. This management structure allows every member in it to be treated as an equal. All members share the same amount of responsibility in operating the LLC on a day-to-day basis. There is no board of directors in a member managed LLC since this would disrupt the entity’s natural equality balance. If every member is equally invested in running the company or your LLC has limited resources and needs each member to help out, it may be ideal to incorporate as a member managed LLC.
Much like filing as a single member LLC, the application process is quite similar for member managed LLCs. One major difference, however, is listing out the members. Unlike a single member LLC’s application, where you only needed to list yourself as the sole member, member managed LLCs must fill out their LLC application forms a bit differently. They must list the names of each member and note that the LLC is filed under member managed status. The entity also requires proof of the member managed LLC’s existence, which may be found in creating and maintaining LLC operating agreements.
Manager Managed LLC
What if your LLC has too many members and struggles to delegate duties to everyone and ensure that they get the job done properly? If you find this is the case for your company, it may be time to form a manager managed LLC structure.
Under a manager managed LLC, a board of managers (similar to a board of directors in a corporation) oversees the direction and operation of the business. Having a board of managers at the helm does mean that the LLC’s members receive less control than they would under another management structure. It is advised that you discuss whether or not to choose a manager managed LLC with the other members first. You need to be certain that every member agrees to the decision and approves the organizational decision before moving forward. Once you have every member’s vote, you may file as a manager managed LLC and complete your application accordingly. And, much like the single member and member managed LLCs before this one, remember to create proof of your LLC’s existence through an operating agreement.