Manager Managed v. Member Managed LLCs

The members or managers of a limited liability company (“LLC”) have the power to control the business and affairs of the LLC depending on whether the LLC is “member managed” or “manager managed”. LLCs are unique legal entities that could be considered a hybrid between a corporation and a partnership. In corporations, shareholders elect directors who appoint officers to run the business and affairs of the corporation. In a partnership, each partner has equal control over the business and affairs of the partnership, except in a limited partnership where only a general partner possesses such power and authority. LLCs that are “member managed” grant the power and authority to control the business and affairs with the members. LLCs that are “manager managed” grant the power and authority to control the business and affairs with managers elected by the members.  

1. Key Differences between Member Managed and Manager Managed LLCs

The differences between member managed and manager managed LLCs are nuanced and generally focus on three critical areas: (i) agency, (ii) voting, and (iii) liability. Evaluating whether an LLC should be member manager or manager managed requires a thorough examination of these issues to determine the optimal management structure. 

A. Agency

Agency is perhaps the most significant difference between member managed LLCs and manager managed LLCs. In a member managed LLC, each member is an agent of the LLC for the purpose of its activities and affairs, and an act of a member carried on in the ordinary course of the LLC’s activities and affairs binds the LLC except in limited circumstances. See § 605.04074, Fla. Stat. Ann. In a manager managed LLC, a member is not an agent of the LLC for the purpose of its business solely by reason of being a member. Id. Instead, each manager is an agent of the LLC for the purpose of its activities and affairs, and an act of a manager carried on in the ordinary course of the LLC’s activities and affairs binds the LLC except in limited circumstances. Id.

The default statutory rules for member managed LLCs create potentially harsh and unintended consequences for the unwary. Each member of a member managed LLC receives equal power and authority to bind the LLC in the ordinary course of the LLC’s activities and affairs, regardless of ownership. In a member managed LLC, a 1% owner has equal power to bind the LLC in the ordinary course of business as a 99% owner. Each member receiving the power and authority to bind the LLC increases the potential for disputes when members disagree on actions taken by a member without consulting with the other members. For large or growing LLCs with multiple members, the potential for disputes significantly increases as the admission of each additional member vests power and authority to bind the LLC with each member subsequently admitted. 

The default statutory rules for manager managed LLCs provide a significantly more organized operating structure. In a manager managed LLC, only the managers elected by the members have the power and authority to bind the LLC. Members of a manager managed LLC can restrict members from entering into contracts without the consent of the members by vesting such powers with the manager. For large or growing LLCs with multiple members, the admission of additional members will not increase number of individuals possessing the power and authority to bind the LLC, as such right remains vested with the managers. 

B. Voting

Voting presents unique issues that require careful consideration when deciding between a member managed or manager managed LLC. In a member managed LLC, each member has the right to vote with respect to the management and conduct of the LLC’s activities and affairs and with a majority vote of the members required to undertake any action and each member possessing a vote equal to such member’s then-current percentage or other interest in the profits of the LLC owned by all members. See § 605.04073, Fla. Stat. Ann. In a manager managed LLC, each manager has equal rights in the management and conduct of the LLC’s activities and affairs. Id. Matters within the ordinary course of the LLC’s activities and affairs are decided by the manager, and if there is more than one manager, a majority of the managers, with member consent only required for matters outside the ordinary scope. Id.

The default statutory rules for manager managed LLCs allow for a smoother operating procedure compared to member managed LLCs. By vesting the decision-making power with a single manager or group of managers, members do not have to hold meetings to decide routine business decisions, as managers have the right to make such decisions. Additionally, manager managed LLCs allow for an organizational structure where members in majority control can remain passive participants in LLC operations with the power to appoint and remove managers. 

C. Liability 

Liability is another critical issue that requires careful consideration when deciding between a member managed or manager managed LLC. In a member managed LLC, each member owes fiduciary duties of loyalty and care to the LLC and members of the LLC. See § 605.04091, Fla. Stat. Ann. In a manager managed LLC, only the managers owe fiduciary duties of loyalty and care to the LLC and members of the LLC. Id. In the case of a member managed LLC, a member’s failure to uphold their fiduciary duties may impose personal liability on the member. See § 605.04093, Fla. Stat. Ann. In the case of a manager managed LLC, a manager’s failure to uphold their fiduciary duties may impose personal liability on the manager. Id. 

Members can avoid fiduciary duties and resulting liability through a manager managed LLC. By structuring the LLC to be manager managed, only the managers owe fiduciary duties of loyalty and care to the members and LLC. Managers must exercise care when acting on behalf of the LLC to comply with the fiduciary duty of care and refrain from competing with the LLC to comply with the fiduciary duty of loyalty. Members of a manager managed LLC are not subject to any fiduciary duties and generally remain free to undertake any activities outside of the LLC.

2. Operating Agreements and Manager Managed or Member Managed LLCs

Whether an LLC is member managed or manager managed, having an operating agreement can provide tremendous benefits to the LLC and its members. An operating agreement can resolve agency issues by vesting specific members or managers with the power and authority to bind the company on certain transactions. Additionally, operating agreements can vary the voting rights provided to members and allow members to possess voting rights different from their economic interests or authorize certain transactions without a member vote. Furthermore, operating agreements can include a tie-breaking mechanism if the managers or members cannot achieve a majority vote on a particular issue. Moreover, in manager managed LLCs, operating agreements can create clear procedures for adding or removing managers and differentiate between decisions that are to be decided by managers or members. Operating agreements can also alter the duty of care or loyalty to exclude specific actions or transactions that may otherwise result in a breach or allow for indemnification of the members or managers. 

Conclusion 

Understanding the nuances between member managed and manager managed LLCs will ensure company operations occur as intended. Members frequently overlook issues related to agency, voting, and liability when structuring the management of an LLC. Drafting operating agreements to address member concerns will allow the LLC and its members to operate under their own set of mutually agreed-upon rules. Otherwise, members must rely upon the applicable statutory provisions when deciding between a member managed and manager managed LLC and operate accordingly.