Striking it out on your own can be an exciting new chapter of life, especially if you get to pursue dreams you’ve pushed to the side for years. When weighing up your business structure options, a limited liability company (LLC) is particularly attractive due to the protections it offers.
You’re set on this choice, but you need to make another important decision: Should the LLC be run by its members or a manager? This can be a dilemma, so read on to find out what the pros and cons are for the debate between a member-managed vs. manager-managed LLC.
Pros of a Member-Managed LLC
In this structure, the owners are directly responsible for the day-to-day operations and decision-making. As you may have guessed, this can be a double-edged sword.
Below are the positives of an owner-run LLC.
As stated above, all members are responsible for the day-to-day operations and decision-making of the business, which means they have direct control over the LLC.
This can be advantageous for small companies where members want to actively participate in running the business. In other words, this is a more hands-on approach.
Because all members are involved, decision-making can be more straightforward. As a result, you’ll have quicker and more agile responses to business opportunities or challenges.
One of the biggest strengths of an LLC being member-managed is that there’s lots of flexibility. Members can easily discuss and make decisions without the need for additional layers of approval. This means that the business can adapt to changing circumstances easily.
Along those lines, there’s better adaptability to member changes too. New members can seamlessly integrate into the decision-making process without disrupting the existing management structure.
When the members have to work with one another to shape the company’s future, this fosters strong relationships among them. Collaboration and communication may be more direct and personal, which grows meaningful long-term relationships. There’s more transparency as well.
In addition, all members are actively engaged in the business, which can lead to a higher alignment of interests. This can contribute to the overall success and growth of the LLC.
Lower Administrative Costs
Because there are fewer layers of management, administrative costs can be lower. After all, there’s no need to hire external managers, which can be cost-effective for smaller businesses.
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Cons of a Member-Managed LLC
The above pros may seem wonderful, but before committing to a member-managed LLC, you need to see the big picture first. Here are some drawbacks to consider.
If your LLC is on the larger side, then decision-making can become complex and time-consuming. Unanimous agreements may be challenging to achieve, causing delays in crucial and time-sensitive business decisions.
Potential for Conflicts
When members are involved in day-to-day operations, the likelihood of disagreements and conflicts increases. If there are major differences in opinions and management styles, then people can really clash, and this can ruin relationships.
Typically, member-managed LLCs have owners who are involved in various aspects of the business. As a result, there may be a lack of specialization since members may not have specific expertise in certain areas.
Difficulty in Delegation
On that note, members may realize the lack of specializations, and they may take action to rectify this issue. However, if other owners aren’t willing or able to take on certain roles, it can become difficult to efficiently manage and operate the LLC.
Potential for Unequal Contributions
In a group setting, it’s tough to distribute work equally, even if all members are actively involved. The variations in the level of commitment and contributions can cause some people to have feelings of inequality or resentment.
Limited Separation of Ownership and Management
Those who prefer to have a more hands-off approach to the business will not like a member-managed structure. Because there’s no clear separation between ownership and management roles, members who prefer to be more passive will be at a disadvantage.
As the LLC grows, this structure option may become less scalable. Usually, larger businesses require more specialized management roles.
Also, the direct involvement of all members can become impractical and inefficient. Expect slower response times, increased bureaucracy, and a lack of focus on strategic priorities.
Pros of a Manager-Managed LLC
In a manager-managed LLC, the members can appoint one or more managers to handle the daily operations and decision-making on their behalf. Here are the benefits of doing so.
Specialization and Expertise
Members can take the time to research and hire professional managers who have specific expertise in running the business. This allows for specialization in key areas, and therefore, better efficiency and effectiveness in management. It’ll be especially beneficial in larger businesses where quick responses to market chances are crucial.
You’ll have a clear hierarchy with a manager-managed LLC since it’ll separate ownership from day-to-day management. This can help streamline decision-making processes and establish a more organized business structure.
Passive Member Involvement
Members who desire a hands-off approach should choose this route when thinking over LLC manager vs. member structures. When they have professional managers handling daily operations, this allows them to focus on investment and strategic decisions rather than being directly involved in management. This also gives them more flexibility in their roles and level of involvement.
Reduced Conflict Potential
When members don’t have to deal with day-to-day business decisions, there are significantly fewer chances for them to butt heads with one another. This can contribute to a more peaceful and harmonious working relationship among owners.
In the beginning, the LLC can start off with one or two professional managers. As the business grows, members can hire more managers to handle additional responsibilities. Plus, the structure can adapt to the increased complexity of larger operations.
Better Chances of Outside Investment
A manager-managed structure resembles a corporate management structure, and this may be more attractive to outside investors. They often prefer a clear division between ownership and management roles, so if you think your LLC will need third-party funding, then this may be the better choice.
Cons of a Manager-Managed LLC
If you now think the difference between manager-managed and member-managed is clear, you have to factor in the negatives before making a decision. Below are the drawbacks that come with manager-managed LLCs.
Loss of Direct Control for Members
Owners who want hands-on involvement on a day-to-day basis will probably feel a loss of direct control over the business. It’s likely that professional managers will make decisions without the immediate input of all members.
In addition, these members may feel marginalized. This can result in dissatisfaction and a sense of detachment from the business.
You may get lucky and get managers who communicate amazingly with the LLC owners. But more often than not, there may be challenges in communication between the two, especially if there’s a lack of transparency or regular updates on business operations. Not only can this lead to misunderstandings and conflicts, but it can further contribute to the feeling of loss of control too.
Dependency on Managers’ Competence
The success of a manager-managed LLC heavily relies on the competence and effectiveness of the chosen managers. If they lack the necessary skills for the job, or they make poor decisions, it’ll negatively impact the company.
Not to mention, if they decide to leave the company, there could be major disruptions. You may need to find suitable replacements, which can be time-consuming and may introduce uncertainty.
Potential for Manager-Owner Conflicts
While you may eliminate friction between owners, you may instigate issues with the manager(s). Conflicts of interest may arise, especially if their goals and priorities differ. Balancing the interests of both groups can be a monumental task, and it may feel impossible to achieve a unified vision for the company.
Hiring professional managers can be expensive, especially if your LLC is in its early stages and/or has limited financial resources. This cost can end up impacting the company’s overall profitability.
Member-Managed vs. Manager-Managed LLC: Which Will You Choose?
As you can see, there are strengths and weaknesses for both sides in the member-managed vs. manager-managed LLC discussion. There’s no right answer, so it’s essential that you and the other LLC members carefully assess your business needs, as well as your skills and preferences.
If in doubt, you should consult with legal and business professionals. They can provide additional LLC member vs. manager insights to help you make an informed decision about the most suitable management structure for your specific company.
Have you made a decision and are ready to start your LLC? Then sign up with Business Anywhere today. We can register your business in all 50 US states.