The Two Types of LLCs: Which One Is Right for You

Types Of LLCs

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Forming a Business

Starting a business requires you to choose a business structure that suits your needs and circumstances. Among startups, a popular choice is a limited liability company (LLC). With this, you can protect your personal liability and enjoy pass-through taxation.

Depending on the state where you choose to operate, your company will be governed by certain laws. But, generally, the legal structure is the same. The owner/s will be known as member/s. You can also choose to be either a single-member or a multiple-member LLC.

Choosing the Management Structure

Once you opt to form an LLC, you have to decide on the management style that your company will use. This will determine how you will take care of your daily business operations.

The manager/s will have the legal authority to bind the company in contracts and agreements. They will also be in charge of running business activities. Here are some of the tasks that a manager is authorized to handle:

  • Make legal and financial decisions
  • Open a bank account under the name of the LLC
  • Enter contracts and agreements
  • Buy or sell real estate, vehicles, investments, and other financial instruments
  • Dispose of or divest company assets
  • Borrow money or obtain financing
  • Hire employees and independent contractors

It is also important to take note that managers have a legal obligation to always act in the best interest of the company.

Member Managed LLC

This structure is the more common choice for many startups. It involves all of the owners sharing the responsibility for the daily operations of the business. It is the go-to option for small businesses with limited resources and those that do not need a separate management level for operations. Business owners who want to have direct involvement in managing and running their companies also tend to choose this. All members have the authority to act as agents of the LLC. Member managed LLC is the default structure in many states, so if you do not prefer this management style, you will have to mention that in your formation documents.

Manager Managed LLC

There are situations where a manager managed LLC is preferable. One is when the members do not play active roles in the daily operations of the business. Instead, they either delegate one or more members to handle management responsibilities. In other cases, the LLC chooses to hire nonmembers as managers. Unless the state where you formed your LLC has restrictions on the management structure, you can appoint third-party managers as well.

While it may be the less common structure choice for LLCs, it can be a useful option for those who want to run their business like a corporation. Owners can still exercise their control of key company issues by voting. However, they will not be directly involved in managing and running daily business operations. It can be advantageous if your company is in any of the following situations:

o   Your company is large

o   It has many owners

o   Members desire anonymity

o   Members prefer passive ownership

Proper Documentation

You may indicate the management structure of your LLC in the formation documents if the state requires you to disclose the information. However, some states allow companies to decide internally. No matter what the case may be, it is best to properly document the decision of your LLC.

You can do this by having an operating agreement. In most cases, states do not ask for a copy of this document, so it will probably be an internal file. Nevertheless, it will help in defining the management structure of the business. Additionally, it can set the rights and responsibilities of each member and/or manager.

A member managed LLC can include voting rights, additional capital contributions, buy-out provisions, and other operational issues. Meanwhile, a manager managed LLC can include the authority and responsibilities of managers like hiring decisions and equipment purchases.

An operating agreement is a document that can help prevent any misunderstandings and issues in the future. If you need some help in preparing your formation documents and operating agreement, it is best to contact a reliable third-party organization like DoMyLLC today.