What is a Member-Managed LLC? A How-To Guide
A Limited Liability Company (LLC) can be either member-managed or manager-managed. Here's why you might choose to create a member-managed LLC in California or any other state.
A member-managed LLC is one in which all the members handle the daily tasks of running the company. This kind of collaboration is probably typical of most LLCs created in the US. These are small businesses with a few principals, who put up the initial capital between them and then generate the "sweat equity" together.
When all the members of a company work in the business together, each of the members generally has expert-level skill in some aspect of the business, and it makes sense for them to have meetings in which they all get a vote on business decisions.
In California the selection of how you run the company is declared at the beginning, in the Articles of Organization filed with the state to create the LLC. This choice can always be amended by a vote of the members and a simple filing with the Secretary of State.
Voting rights and membership interest in the LLC are established for each member at the beginning. Units of interest are issued, and members can receive different ownership interest percentages - as well as being allocated different distributions from company profit regardless of interest percentage.
These elements of ownership and income, along with voting rights, are flexible. They're all established in the Operating Agreement - which California doesn't require, but which even the smallest LLC is foolish to ignore.
The Operating Agreement is something to be hammered out early in the game, before the company gets to work. It acknowledges member Contributions and establishes membership interests, profit distributions and voting rights, as well as quorum - how many members (or interest percentage) does it take to hold a meeting and make a decision?
Remember in a member-managed LLC, each member can act on behalf of the company and can bind the company to a course the other members may not want. As an LLC, members are protected from individual liabilities incurred by any member, but you still want to establish in the operating agreement what kind of vote it takes to make company decisions and sign for outside contracts, leases, purchases, etc.
The Operating Agreement will reflect a clear view of each member's value to the company. This can be tricky to establish between friends and former colleagues (and especially family members) when they join together in a mutual enterprise. So, obviously the least painful time to do this is at the beginning, before work is performed and value created.
If you have significant disparities between member abilities and contributions, versus interests and distributions, it may be a good investment to use an attorney to nail down your LLC Operating Agreement.
A Limited Liability Company (LLC) can be either member-managed or manager-managed. Here's why you might choose to create a member-managed LLC.