- Hi, everyone.
I'm Attorney Aiden Durham with 180 Law Co. in Colorado,
and welcome back to "All Up In Yo' Business."
(gentle cheery music)
On this episode of "All Up In Yo' Business,"
we're gonna talk about LLC management.
I'm gonna tell you guys what it means
to be a member-managed LLC or a manager-managed LLC,
why you would pick one over the other,
and how you can change it if you initially set it up wrong.
But first, don't forget to like, subscribe, and share,
and check the description
for links to additional information and resources,
including my free downloadable guide
on how to pay yourself in a single-member LLC.
All right, so one of the benefits of operating as an LLC
as opposed to, say, a corporation
is that LLCs can be very flexible and customizable
when it comes to structuring
how the LLC is gonna be managed and operated.
Before we really get into it,
I wanna remind you all that every state is different.
The forms used to form an LLC
will be different for every state,
even though they typically contain
a lot of the same kinds of information.
And while the general principles
that I'm gonna be talking about do apply to all LLCs,
the exact laws and statutes
are gonna be different in every state.
So in most states, when you're forming an LLC,
you will need to indicate on the articles of organization,
or whatever the other term is used,
not every state calls it articles of organization,
you'll need to indicate if the LLC
will be managed by the members or managed by managers.
The primary difference between a member-managed LLC
and a manager-managed LLC
has to do with who can act as an agent of the LLC
and who has authority to bind, legally bind, the LLC.
The LLC is a legally recognized being
which can sign contracts
and enter into legally binding transactions
with other parties.
But since the LLC isn't a person who has the actual ability
to sign contracts or engage in conversations
about potential business transactions,
the LLC needs some humans who can act on its behalf,
and that's where the members or managers come into play.
In a nutshell, in a member-managed LLC,
the members will be actively involved
in the day-to-day operations, decision-making,
and overall running the business.
In a manager-managed LLC,
the members will elect one or more managers
who will be responsible for most of the business operations,
decision-making, and day-to-day running of the business.
The members will be more like silent partners
who typically only get to weigh in
on major decisions that affect the LLC.
In Colorado, this is what our statutes say about it.
If the articles of organization
provide that management of the LLC
is vested in the managers,
then a member is not an agent of the LLC
and has no authority to bind the LLC
solely by virtue of being a member.
And each manager is an agent of the LLC
and can sign documents on behalf of the LLC
and can legally bind it.
If the articles of organization
provide that management of the LLC is vested in the members,
then each member is an agent of the LLC
and can sign documents in the name of the LLC
and legally bind the LLC.
So when a member-managed LLC, the members,
solely by virtue of being members,
are authorized to act on behalf of the LLC.
Whereas in a manager-managed LLC,
only the managers are authorized
to act on behalf of the LLC.
The members of the LLC
are not automatically given that authority,
unless they're also managers.
By making your LLC member-managed or manager-managed
doesn't just affect who can act on behalf of the LLC.
It also affects what duties are owed to the LLC and by whom.
By default, LLC members or managers
owe certain duties to the LLC itself
and to the other members.
The members of a member-managed LLC
and managers in a manager-managed LLC
owe a fiduciary duty to the LLC.
In some states, these duties can be revised, broadened,
or eliminated in the LLC's operating agreement,
but without that, very generally speaking,
the members or managers have to act
in the best interest of the LLC at all times
when they're carrying out their duties and obligations.
In a member-managed LLC, all of the members
owe a duty of care and duty of loyalty to the LLC.
If a member breaches those duties by,
for example, engaging in a competing business,
the member could be personally liable to the LLC
and the other members as a result of that breach.
In a manager-managed LLC, it's typically only the managers
who owe that duty of care or duty of loyalty to the LLC.
The members aren't gonna be bound by these fiduciary duties
solely by virtue of being a member,
unless they're also managers.
The process for electing and removing managers
will depend on your state's laws
and the LLC's operating agreement.
Most states will require either majority or unanimous vote
of the members to elect, remove, or replace a manager.
But just like with those fiduciary duties,
you can change those requirements
in the LLC's operating agreement.
I think it's also important to mention
that you can be both a member and a manager.
Unless the state laws
or the operating agreement prohibit it,
a member can be elected manager of a manager-managed LLC.
So how do you know which is right for your LLC?
Member-managed or manager-managed?
Of course, it depends on your specific situation.
Generally speaking, in a single-member LLC,
member-managed is gonna make the most sense.
Since there's only one member to begin with,
we're assuming that one member
is gonna be actively involved in the business,
so it makes most sense to have it be member-managed.
You certainly can do manager-managed
as a single-member LLC.
There's nothing inherently wrong with that.
But in that case, the single member
has to then elect herself as the LLC manager.
Again, that's fine to do, but what's the point?
If the one member
ultimately wants to be the one managing the business
and acting on behalf of the LLC,
then it makes sense to just structure it
as a member-managed LLC.
In multiple-member LLCs, member-managed is best
if all of the members wanna have an active involvement
in the business' operations.
Again, this makes most sense
if all the members want to be actively involved.
There's no point in electing managers
if all of the members wanna be managers.
But let's say instead that you have a member
who does not want to be really involved
in the day-to-day operations,
maybe you have some folks
that just wanna invest some money into the business
and see a return on their investment.
They don't particularly care how it gets there.
That would be a situation more suitable
for a manager-managed structure.
Let's say it's you and two other member investors.
The three of you would all be members
and can elect you as the manager.
It's important that you understand
and recognize the difference before you form your LLC.
Everything thereafter, including the operating agreement,
who can sign contracts on behalf of the LLC,
who needs to consent to different actions of the LLC,
everything will be very different
for a member-managed LLC versus a manager-managed.
So a big question that I get asked pretty frequently
is what do I do if I originally formed my LLC one way
but realized I did it wrong?
What if you're a single-member LLC
and you accidentally checked that manager-managed box
on the articles of organization?
Luckily, you're not locked into that management structure,
and it is possible to change it later on if needed.
Typically, you can do this
by filing an amended articles of organization.
This is exactly what it sounds like.
You are amending or changing
the LLC's articles of organization.
So if you find yourself in a situation
where you need to change your LLC
from member-managed to manager-managed
or manager-managed to member-managed,
you can amend the LLC's articles of organization
to correct that management designation for the LLC.
So to summarize, in a member-managed LLC,
all of the members are agents of the LLC,
can act on its behalf,
and owe certain fiduciary duties to the LLC.
In a manager-managed LLC, it's only the manager or managers
who are elected by the members
that are agents of the LLC, can act on its behalf,
and owe those duties to the LLC.
As with everything, whether your LLC
should be member or manager-managed
depends on your specific details and circumstances,
so it's always best to consult with an attorney
who's licensed in your state
if you're unsure of the proper structure for your business.
That's all for this episode, folks.
Drop a comment below, let me know what you think,
and don't forget to check the description
for links to additional information and resources.
Thank you all so very much for watching.
I'm Aiden Durham, and I'll see you next time.
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