California LLCs: Member-Managed vs. Manager-Managed

December 20, 2012

We have written several posts in the past about some strategic choices faced by a person or persons who are establishing a limited liability company. These include important considerations such as the method of taxation, the manner in which the constituent members are paid, and the things to be addressed in the company charter or operating agreement. There is one choice, however, that some LLC novices neglect to consider until the choice is laid before them by a California business lawyer: Should the limited liability company be managed by its constituent members, or should it appoint people for the express purpose of handling the managerial duties?

The short answer is the same frustrating answer that business clients will often hear from attorneys: "It depends." What does it depend on exactly? More often than not, it depends on the size of the company (the number of members), the aptitude of the individual members to perform managerial tasks, and, distinctly, the desire of an individual member to perform managerial tasks.

For most LLCs, the size of the company is the chief deciding factor. The vast majority of LLCs are comprised of one or two members. Many others are comprised of only a handful of members. When the company size is so small in terms of membership, the individual members are more likely to want a stake in the management of the company. The classic case is that of a small business. Suppose two best friends open a restaurant. Both friends are almost always going to want a stake in the management and direction of the company (such as organizational structure, addition and subtraction of members, or acquisition of company assets) as well as in the day-to-day operations of the business (e.g. employees, recipes, menus, advertising). Although there are two distinct categories of company operations, a team of two members is likely to want to be involved in both.

When the number of members climbs, so too does the likelihood that managerial and non-managerial duties will be delegated amongst the membership. Imagine an LLC comprised of ten members. Not only might it be overly cumbersome for all ten members to have a share of the managerial role, but some of the members may only want an investment stake in the company. These members want their stake in the company to produce profit, but they may not have the aptitude or desire for making management decisions. In this type of situation, it is important that the charter or operating agreement be specific as to the roles of each constituent member, delegating managerial authority only to those want it and can handle it.

An experienced California business attorney should be able to interpret the goals of your LLC and recommend an organizational structure that places managerial duties in the hands of as many or as few people as business needs dictate. The same attorney should be able to craft a charter or operating agreement that effectively communicates the managerial structure to the State, the public, and the company members.