Before forming an LLC, it is important to understand how it will be structured and managed. LLCs offer business owners complete flexibility to create unique management structures. This includes choosing officer titles, delegating management responsibilities, and structuring ownership interest.
Here we breakdown common management and ownership structures for LLCs, including who the LLC Members and Managers are.
Who Owns An LLC?
LLCs are owned by Members who divide the ownership interest in the company. The LLC Operating Agreement names and identifies the company’s Members. The Operating Agreement is the corporate document that governs the internal affairs of an LLC. It is a contract between the Members in which they agree upon how specific functions within the company will work.
The Operating Agreement should detail:
- The ownership interest of each Member;
- The voting rights of each Member;
- Shares in profits and losses;
- Arrangements for making distributions; and,
- Management responsibilities (if any) of Members.
LLC Ownership Structures.
An LLC must have at least one Member. An LLC with only one Member is referred to simply as a single-member LLC. The Operating Agreement for a single-member LLC details that the sole Member has all of the benefits and burdens of ownership and controls all decisions.
LLC ownership however can take on many different forms. The LLC Operating Agreement allows for complete flexibility when it comes to naming members. In the case of a holding company structure, one LLC is named as the single-member of another LLC, often called a subsidiary. The holding company, whether wholly-owning or having a majority interest in the LLC, has voting power and can make decisions for the subsidiary.
Examples of other ownership structures include:
- Two or members owning a family business;
- Two or more unrelated parties joining to engage in a business venture;
- A single-purpose managing member together with one or more other members.
An LLC can create different classes of Members in its Operating Agreement. Membership classes can have different voting rights based on aspects such as total ownership interest, capital contribution, or management responsibilities.
What Is The Maximum Number Of Members In An LLC?
An LLC can name an unlimited number of Members in its Operating Agreement. However, it is advisable to keep the number of LLC Members as low as possible.
The biggest threat to a business is often internal conflict between Members. Bloating an organization by bringing in Members who are not necessarily involved with the business can invite unwanted risk.
LLC Members vs. LLC Managers
The distinction between “Member” and “Manager” is important to understand in the context of an LLC. “Manager” refers to an individual that is tasked with overseeing the company’s day-to-day operations. However, Managers are typically not included in the ownership structure and do not have a say in any major company decisions.
LLC Operating Agreements often define specific “Major Decisions” that are reserved to the LLC’s Members. These typically include:
- Sale of property;
- Operating and capital budgets;
- Admission of new members;
- Major capital expenditures;
- New business ventures; and,
- Decisions regarding bankruptcy or insolvency.
It is important that LLC Managers sign signature-blocks in contracts specifically under their management capacity and not as “Members”. This is similar to the corporate context where contracts should not be signed by someone as a “stockholder”. This is because a stockholder does not have agency authority and cannot act on behalf of the company outside of a vote with other stockholders.
LLC Management Structures
LLC’s typically fall into one of two categories: being Manager-Managed or Member-Managed.
1.) What Is A Manager-Managed LLC?
In a Manager-Managed LLC, the Members delegate the responsibilities of running day-to-day operations to a third-party manager. Managers are typically paid executives who have experience with the type of business operated by the LLC.
The LLC Operating Agreement needs to be specific in detailing this type of management arrangement. The Operating Agreement establishes the exclusive authority of the Manager through agency as well as the rights that the Members retain.
The main rights retained by the Members are typically:
- The power to replace the manager; and,
- The ability to make “Major Decisions” described in the Operating Agreement.
2.) What Is A Member-Managed LLC?
In a Member-Managed LLC, the LLC Members simply double as the Managers. In addition to having ownership interest, the Members also run the day-to-day activities of the LLC. The Operating Agreement usually calls these individuals “Managing Members”.
Single-member LLCs are typically designated as being Member-Managed as the sole Member undertakes all of the responsibilities in running the company.
In a multi-member LLC, it is best to only name one person as the Managing Member. This simplifies the operations of the entity.
What Titles Do LLC Members Have?
An LLC has the freedom to create whatever officer titles it wants. LLC members can hold many different titles or positions in an LLC simultaneously. The three common positions in an LLC are: President, Secretary and Treasurer. In the case of a single-member LLC, the sole member typically fills all of these positions.
Do LLCs Have Directors?
It is possible for LLCs to borrow certain management structures from corporate organizations. For example, an LLC can choose to establish a “Board of Directors” or “Board of Managers” which are tasked with appointing officers. The Board is typically a committee of individuals elected by the LLC Members who hold ownership in the company. This structure would be detailed in the company’s Operating Agreement.
The Board structure tends to work well for family-owned and managed businesses where siblings want to control the company by majority director vote.
Does An LLC Have A President?
Yes, an LLC can have a President. An LLC has the freedom to give its Chief Executive any title it chooses. President is the most popular title for the highest ranking manager in an LLC. The LLC Operating Agreement typically gives the President general management powers over the business. This includes the ability to open bank accounts for the LLC.
Does An LLC Have A CEO?
Yes, and LLC can have a CEO. Again, LLCs can provide Managers or Managing-Members with whatever titles they choose. “President” is the most popular title for an LLC’s highest ranking manager.