A limited liability company (LLC) is one business structure option available to you. It offers a step between sole proprietorship and corporations, which provides you with tax benefits, limits personal liability for business debt, and creates a business structure that is easy to manage. There are different types of LLC, different ways to manage them, and a number of LLC titles that you should be familiar with when setting up your business.Table of Contents:
- Types of LLCs
- LLC Ownership and Responsibilities
- LLC Titles and Who Should Use Them
- LLC Management Structures
There are two types of LLCs: single-member LLC and multi-member LLC. A member is a person who has an ownership interest in the LLC.
- Single-Member LLC: As the name implies, a single-member LLC has just one member who owns 100% of the business.
- Multi-Member LLC A multi-member LLC has two or more members. They might have equal shares in the business, for example, there could be two members who each own 50% of the business. It’s also possible for members to have unequal shares of the business. One member might own 50% while two other members each own 25%. The LLC operating agreement outlines how much of the business each member owns.
LLCs have two main roles involved in ownership and management of the business. The two key roles are member and manager. Someone may be both a member and a manager at the same time, or they might hold just one of these roles.
An LLC member holds an ownership interest in the business. They might be the sole owner of a single-member LLC or they might be one of the owners of a multi-member LLC. A member might also be a manager or they could be a passive investor, or actively involved in the business without taking on a management role.
LLC managers are the people who are in charge of the operation of the business. They are responsible for the day-to-day running of the business and can fall into one of two categories.
- Member Managers: A member or members of the company can also be designated as a manager. In addition to having ownership of the company, they are also involved in the operation of the business.
- Non-Member Managers (Employee): Another option is to hire a manager who is not a member of the LLC. These people are employees who are paid a salary and do not own or share in the profits of the company.
Understanding what titles you can and should use can get a little confusing. If you can be a member, a manager, or both, knowing which title is appropriate seems complicated. However, it’s not as complicated as you might think. There are three key titles that you should be aware of. Here are titles that are available and who can use them.
A Member is anyone who owns some or all of an LLC. If you own some or all of the LLC and it is member-managed, you can choose to use the title Member. However, if the LLC is manager-managed and you are not the manager, you must use the title Member. You can’t use the title of Managing Member or Manager because you don’t have any management interest in the company.
A Managing Member is someone who both owns some or all of the company and manages it. This is you if you are a member of a member-managed LLC or if you are both a member and the manager of a manager-managed LLC. You could also use the title Member, but Managing Member is more specific.
Managers can be anyone who has decision making power within the LLC. This can be be a member, a non-member employee or even a third party designated to make decisions on behalf the LLC.
There are two LLC management options available. These determine who manages the LLC.
A member-managed LLC is managed by all of the members. It’s the most common structure chosen because it’s suitable for a lot of small businesses. It’s a good choice when all of the members want to be involved in the management and day-to-day operation of the business. If everyone will be working on things like sales, marketing, manufacturing, or other important areas, it makes sense for members to manage the LLC. However, it might not always be the best option.
A manager-managed LLC is run by a manager instead of all of the members together. The manager might also be a member but they can also be an employee who is hired as a professional manager. This structure can be a good option for some businesses due to several reasons. A manager-managed LLC can work for companies where members want to be silent investors. They don’t need to be involved in the day-to-day operation of the business with a designated manager in charge.
Another reason to choose a manager-managed LLC is that there are a lot of members. When there are multiple members, things can get complicated, and making decisions is tough. Having one managed simplifies things and can reduce disagreements and conflict. If members don’t have an adequate level of skill or experience in managing a business, it can also make sense to choose a manager-managed structure for your LLC.
A manager-managed LLC can further limit personal liability too. If there is a manager who has management rights for the company and a creditor pursues a member for personal debts, it can be argued that the creditor cannot take a management interest in the company. On the other hand, a managing member may have more personal liability than a non-managing member, so this is something to consider.
Whether you choose a member-managed LLC or a manager-managed LLC, make sure that members and managers only use the appropriate titles in the operating agreement and on other official documents. Be careful to avoid using titles that you do not have the right to use.