Is My LLC Member-Managed or Manager-Managed?
One of the questions that often comes up when forming an LLC is if the LLC should be member-managed or manager-managed. While it is a fairly simple process to form an LLC in Colorado, choosing between member-managed or manager-managed is where many business people get hung up. Learn more about how to form an LLC in Colorado.
The owners of an LLC are called “members.” An LLC can either be member-managed or manager-managed. This, in a nutshell, means that either all of the owners of the LLC can be actively involved in the day-to-day business operations (member-managed), or that some of the owners can be investors only and not have any management responsibilities (manager-managed).
A member-managed LLC is most common. This is appropriate if all of the members (or, in the case of the single-member LLC, the single member) are going to actively participate in the management and operations of the business. If you are starting a business with one partner, and both of you want to be involved in the management and the smaller decisions that affect the LLC on a daily basis, then you will probably want to be member-managed. Almost all single-member LLCs will be member-managed, at least in the beginning.
A manager-managed LLC is most appropriate in situations where one or more of the members are only investors providing financial support and are not going to be involved in the day-to-day operations. Or, sometimes one or more members don’t have the business acumen to be involved in the management or simply do not want to be. In any of these situations, a manager-managed LLC will allow the members to elect managers. The members can elect one or some of the members to be managers, while the remaining members get to avoid those management responsibilities. The members can also elect an outside third party non-member to be the manager. Or if you are a single-member LLC and you plan on hiring somebody else to take care of the business while you vacation and play golf all day (then call me and tell me what kind of business you are creating, because I want to do it, too). The main reason to form an LLC as a manager-managed LLC is because the members who are not also elected as managers do not have the legal ability to bind the business (in most cases). This allows the LLC to take on investors without running the risk that an inexperienced investor is going to make poor business choices and get the LLC in legal trouble.
In many cases, if you still are not sure whether your business should be a member-managed or manager-managed LLC, manager-managed is a safe default selection. In a single-member LLC, if the single member chooses to make the LLC manager-managed, the single member can elect himself as manager. Similarly, in a multi-member LLC that is manager-managed, if all of the members want to be managers, they can elect themselves as such. The LLC’s Operating Agreement will be the guidelines for how and when members can make such elections, and it will also set forth what a non-managing member can and cannot do.
As with pretty much all business decisions, it is usually the best idea to talk it over with an experienced business attorney prior to doing anything that you may later regret. Many attorneys, myself included, will charge a very reasonable flat fee to help you set up your LLC and draft the Operating Agreement (my fee starts at $500 for a Single Member LLC in Colorado). The up-front costs of having an attorney do the heavy lifting for you will most certainly save your business money in the long run and will set your business up for success from the beginning.
Denver, Colorado business attorney Aiden H. Kramer can help you decide if your LLC is member-managed or manager-managed. Contact Aiden Kramer at (720) 379-3425 or [email protected].
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