LLCs can be managed by all members (owners) or one or more managers. Much of the time, in a small business context, you will see all members managing the LLC. Our preference, and the way we organize most LLCs that we form, however, is to have the LLC managed by one or more managers rather than all members. This is an important decision to make at the outset, as even though the nature of the LLC’s management is set forth in its operating agreement, in many states, including California, this is the one organizational choice you have to make in the LLC’s formation document – the Articles of Organization – which gets filed with the state at the very outset.
When starting a small business, you know who the initial owners are – maybe just one person or a few people starting a company together. Maybe even in the case of multiple owners, everyone owns an equal share and the understanding is that everyone will jointly run the business together – all decisions to be made jointly. This comes up a lot, but in a lot of cases, the owners are not thinking through the overly onerous checks and balances that such a system presents. Certainly it makes sense to involve all owners in a big decision, such as selling or dissolving the company, or adding new members. But what about smaller decisions, such as purchasing a piece of furniture or opting for a different internet provider? Technically, if all decisions are made by all members, and there is no delineation between smaller decisions and larger decisions in the operating agreement, all members have a say in each decision. The agreement may not even specify that decisions require majority vote, or conversely that they do require a unanimous vote of the members, which could lead to some pretty difficult decision-making for small items. Even if majority vote is called for in the operating agreement, what if you have an even number of members, say four, and two members like a couch for the office and the other two members prefer a couple of chairs? Do you really want to waste your time haggling between all members on these types of decisions?
Having a manager-managed LLC can avoid some of these headaches by shifting responsibility to a manager or managers rather than all members. The manager(s) will make all day-to-day decisions, the operating agreement can specify whether the managers, if more than one, must act by majority or unanimous vote. Only the larger decisions will be left to the vote of the members. And the manager or managers can of course be some or all of the initial members as well – this just provides a coherent structure for what decisions are the province of the manager, sort of like a corporation’s CEO that is in charge of the day-to-day affairs, and what decisions are left to the members, who are like the shareholders in a corporation.
Perhaps the biggest benefit of this approach is that if you are ever to add more members to the LLC, they will not automatically be added as decision-makers, except for those larger decisions reserved for member voting. The manager or managers have already been appointed and will continue to be in charge of all day-to-day decision-making. This should come as a relief to most initial owners of an LLC, that they are not necessarily giving up management control over their company every time they want to give equity to an employee, investor or anyone else.
Ultimately, dividing the decision-making labor between an LLC’s manager or managers and its members is a great idea, so that distinctions can be made in the early going between who is in charge of the smaller, day-to-day decisions and what kind of decisions require the entire ownership to weigh in. Even if the entire initial ownership comprises the managers of an LLC, splitting this decision-making up early allows the initial owners maximum flexibility to add members without sacrificing fundamental management control.