When you form a limited liability company (“LLC”), you will need to decide how your LLC will be managed. With LLCs, there are two different possible management structures. You can choose to have a member-managed LLC where all the members (owners) participate in running the business. Or, you can have a manager-managed LLC where only designated members, or certain nonmembers, or a combination of members and nonmembers are given the responsibility to run the business. The other members in a manager-managed LLC are passive investors who are not involved in business operations.
Most people who set up an LLC choose member-management. Under a member-managed LLC, the members share responsibility for the day-to-day running of the business. This approach is more common in part because most LLCs are small businesses that don’t need a separate management level to operate. Unlike corporations, LLCs have a streamlined organizational structure, without officers or boards of directors. As a result, the LLC form is often chosen by people who want to be directly involved in managing and operating their business. If you and the other members of your LLC want to run your own business—actually make and sell products, take orders, provide services—then you will want a member-management structure for your LLC.
In some situations, a manager-management structure may be better for your business. The is most often the case when some members only want to be passive investors in the business. These owners often feel more comfortable if the LLC delegates management responsibilities to one or more other members (or nonmembers).
Two other situations where LLC owners may prefer a manager-management structure are: (1) when your business or ownership is too large, diverse, or complex to efficiently allow for sharing management among all members; or (2) when some of your members are not particularly skilled at management. Delegating management to a smaller group of people or just one person can be an effective way of balancing the varied skills and interests of multiple LLC members, and ensure more competent management of the business. A manager does not need to be a member of the business.
Document Your Choice
In Oregon, if you choose member-management, you will formally document this choice in the articles of organization that you file with the Secretary of State to form your LLC. Further, all LLCs should have a written operating agreement defining the basic rights and responsibilities of the members (and managers, if you have them). In a member-managed LLC, this would include things like member voting rights, additional capital contributions, buy-out provisions, and other important management and operational issues for the owners. Without an operating agreement, you run the risk of finding yourselves in a full-blown crisis when something unexpected arises because basic issues weren’t clearly addressed and agreed to early on. At The Reynolds Law Firm, PC, we have ample experience drafting operating agreements for our clients.
If you choose manager-management for your LLC, this will also be documented in the articles of organization that you file with the Oregon Secretary of State as well as in your operating agreement. In addition to the items mentioned above for members that you want to include in an operating agreement, you also will want your agreement to address what authority and responsibilities the manager, or managers, will have. For example, will the managers have sole authority for all hiring decisions? What about equipment purchases? Just like with the member provisions, documenting the extent of the manager’s—or managers’— authority can help avoid issues in the future.
If you are interested in learning more or want assistance forming a business, call or email us today to set up an intake appointment: email@example.com or (541)738-1800.
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