Member-managed vs. manager-managed LLCs

In the realm of business entities, Limited Liability Companies (LLCs) stand out as a popular choice for many entrepreneurs and small business owners due to their flexibility and distinct organizational structure. They offer a unique blend of liability protection and operational freedom that sets them apart from other forms of business.

Defining the Roles within an LLC

An LLC has two primary roles: members and managers. Understanding the distinctions and responsibilities of each role is fundamental to comprehending the functioning of an LLC.

Member: These individuals hold ownership interests in the company. They contribute capital, share in the profits and losses, and can be subject to capital gains tax rates upon the sale of their ownership interests. They might own individual assets or intangible assets such as intellectual property or copyrights, which add value to the business.

Manager: Managers in an LLC oversee day-to-day operations. While not necessarily required to be a member, they are responsible for making decisions, entering into contracts, and managing the business's activities in a manner that complies with IRS regulations.

Managing an LLC

The management of an LLC involves a spectrum of activities, including but not limited to:

• Day-to-day operations: This includes overseeing accounting, tax compliance, record-keeping, and other routine tasks essential to the business. Leases and intangible assets like intellectual property might be managed as part of the company's operational structure, impacting the purchase price and business sale values.

• Hiring and managing staff: Personnel management and human resources fall under the purview of the managers, ensuring the right team is in place. 

• Ensuring compliance: Compliance with relevant laws and regulations is crucial for avoiding fines, lawsuits and enforcement actions from regulators. 

• Signing contracts: Managers hold the authority to enter into agreements on behalf of the LLC, whether involving an asset sale, purchase, or engaging in contractual agreements for services or products.

• Strategic decisions: Lastly, there are certain activities that rise above day-to-day management. Examples include taking out a large loan to expand to a new location, purchasing the real estate occupied by the business, deciding to sell or spin off part of the business.

Member-managed vs. Manager-managed LLCs

In terms of decision-making structures, LLCs can either be member-managed or manager-managed:

Member-managed: All members actively participate in the decision-making process, often requiring unanimous consent for major strategic decisions. This structure entails shared responsibilities and decisions regarding business sales or purchases.

Manager-managed: Here, the managers are solely responsible for operational decisions. Members take a more passive role as investors, providing capital without involvement in day-to-day operations, potentially overseeing strategic decisions with veto power.

Creating an SPV on Mainshares

On Mainshares entrepreneurs typically form manager-managed LLCs as their special purpose vehicles (SPVs) for acquiring an existing SMB with investors. This affords them clear day-to-day decisionmaking responsibilities while still giving the investors a share of the profits and losses as members in the LLC.

Alignment and clarity: The manager-managed structure allows for streamlined decision-making processes and operational directives, beneficial in managing business sales or purchases within the company.

Directed operations: Managers take charge of daily operations, ensuring efficiency and focus on capital gains rate and depreciation as part of the financial strategy.

Investment vs. involvement: Members provide capital investment without direct involvement in operational decisions, particularly beneficial in scenarios involving business sales or asset purchases.

Conclusion

In conclusion, the key differences between member-managed and manager-managed LLCs lie in the distribution of decision-making responsibilities and operational involvement. Notably, Mainshares' utilization of the manager-managed approach underscores the efficiency and clarity manager-managed LLCs offer in driving business operations, particularly in handling business sales or purchases. 

Understanding the roles and structures within an LLC is crucial for any business owner or prospective entrepreneur considering this form of business entity. The choice between a member-managed or manager-managed structure profoundly impacts the dynamics and functionality of the company. Ultimately, the suitability of one over the other depends on the business's unique needs and the vision of its stakeholders.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.