LLC Management
There are two options for managing your LLC: Member-managed or Manager-managed. The state will require you to choose one.
Note: In most states, LLCs are member-managed by default under state law. This means that if you don’t designate a management structure for your LLC either in your formation documents or operating agreement, then it will be considered a member-managed organization.
All states allow for Single-Member LLCs (1 owner) and Multi-Member LLCs (2 or more owners). If an LLC elects to be taxed as an S-Corp (You do! More on this later.) with the IRS, there is a limit to the number of shareholders (owners) the LLC can have. The limit as of 2020 is 100 shareholders. Should you elect to NOT be taxed as an S-Corp, there is no limit to the number of members an LLC can have.
Before you choose, it’s important to understand the results of each choice.
Member-Managed LLC’s
If you are a self-publishing author, one who is the only member of the LLC, (a single-member LLC) this decision is not one that will affect your business much at the start. But this is a good time to think of the future. In the first article in this section we encouraged you to adopt a “Planning to Succeed” mindset and discussed your business growing beyond what you may be currently envisioning. Your publishing company may take on other authors someday, or maybe hire a permanent editor or cover-artist, making them partners or employees in your LLC. You might add a marketing person to your LLC, one who will need access to the LLC’s bank accounts in order to spend money on ads or handle offers from various ad platforms. You may hire an assistant to handle your social media accounts or to act as your virtual presence. The possibilities are endless.
These people may all be highly skilled in their given areas, but are they good businessmen as well? Do you want them making decisions or committing the LLC to contracts and other deals without the input or approval of you or your other partners? Do they communicate well? If two of them, without communicating first with each other, were to commit the company to contracts that would require a dollar amount that is beyond what is available in the company’s bank account, the company can find itself in dire straits very quickly.
Granted, most LLC’s are small businesses, and most partners wish to be active members of the business. As long as the members recognize their roles, refrain from going outside them, and communicate well with each other, (especially about funding), there is no reason that a member managed LLC cannot succeed.
But it doesn’t always work out that way. Owners may disagree on something important to the point of stalemate. They may misuse company funds or take risks the other members are not comfortable with. When this happens it helps to have one member appointed as the designated leader and final decision-maker.
If any of these scenarios is a concern, then the Manager-managed LLC may be the better option.
Manager-Managed LLC’s
In a Manager-managed LLC you often find partners that wish to have a more passive role in the company. These are partners that wish to focus on their particular niche within the business and leave the day-to-day operations to someone else, the manager.
This Manager takes care of all the business decisions regarding payroll, contracts, legal issues, and correspondence, leaving the other members free to concentrate on what they do best. These passive members make their needs known to the Manager and the manager delegates funds and/or time as needed, keeps the books, handles all the communication, and reports back to everyone regularly on the health of the business. Should the company ever grow to the point that the manager is overwhelmed they can simply delegate management duties to other partners as needed, all without changing the basic structure of the business.
While Member-Management might work fine for the LLC that is just starting out, a Manager-Managed LLC is set for whatever the future may bring.
An LLC Manager will have the authority to do the following on behalf of the LLC:
- Make legal decisions
- Make financial decisions*
- Determine tax structures
- Access the LLC bank accounts
- Establish lines of credit
- Enter into contracts and agreements
- Invest company funds
- Dispose of or divest the company’s assets
- Borrow money and obtain financing
- Hire/fire employees, staff, and independent contractors
* Financial decisions is a broad term. It can refer to something as small as buying coffee to as large as buying office space. It helps to have a set dollar amount limit on when non-manager members can spend the LLC’s money themselves, and when they must get approval from the Managing member before doing so. This not only goes toward good communication; allowing the Manager to plan the company’s spending, thus keeping the financials in good order, while also giving the members the freedom they need to spend money where it's needed for day-to-day operations. The dollar amount limit works better than an itemized list. Natalie the secretary may be allowed to buy coffee for the team with the company credit card, but she can’t buy $500 worth without asking first, even if it is on sale.
Conclusion
Whoever it is that ends up managing the LLC, they have a fiduciary duty (a legal obligation) to act in the best interest of the LLC.
Once you know who is going to manage your LLC, it’s time to talk about your LLC’s Effective Filing Date.
