Since they first emerged in 1977, limited liability companies (“LLCs”) have quickly become the entity of choice for new businesses across the country. LLCs are owned by “members” who, much like shareholders in corporations, enjoy limited liability. Yet the flexible nature of LLCs allows members to craft a business structure that will fit the particular needs of any given venture without having to adhere to the more rigid legal requirements that may apply to corporations.
A Texas LLC is formed by filing a Certificate of Formation with the Secretary of State in accordance with the Texas Business Organization Code. In Texas, the Certificate of Formation specifies whether the LLC will be managed by its members or by managers. Other states (notably Delaware) do not require the Certificate of Formation to state whether it will be managed by its members or managers – that is contained in the Limited Liability Operating Agreement adopted by the members. For the sake of brevity, this article discussed the differences between member-managed and manager-managed LLCs formed under the Texas Business Organizations Code.
In a member-managed LLC, all members have management rights—that is, the right to exercise the powers of the company and to manage its affairs. Generally, this means that all members may run the day-to-day operations of the company. All members participate in the decision-making process by voting on decisions affecting the company, including, without limitation, entering into or approving loans or contracts on the company’s behalf, appointing officers (who may or may not be members themselves), and buying or selling company property. How the members carry out these responsibilities may be defined in the Company Agreement, where members may designate what acts require member votes, determine member voting rights, and otherwise clarify the procedural aspects of the company’s decision-making processes.
Member-managed LLCs ensure that all members have a say in the overall management of the company. If all of the members are involved in the operation of the business, the member-managed LLC ultimately provides its members with a simple, cost-effective structure.
In a manager-managed LLC, the management rights are held by a manager or managers (who may or may not be members themselves) appointed by the members. In this regard, a manager-managed LLC is similar to a corporation: the members are like shareholders—shielded from the company’s liabilities but lacking management rights—whereas the managers are like directors, who are entrusted with making the decisions affecting the company.
In Texas, manager-managed LLCs provide members with greater anonymity in that they are not required to be listed on the LLC’s Certificate of Formation or in the annual report to the Secretary of State, both of which list only the names and addresses of the managers. Furthermore, the manager-managed LLC provides members with the ability to be more of a passive investor in the company—something that may be especially appealing for entities in which the significant number of daily operations and business decisions would best be handled by a streamlined, centralized management structure that does not require the consent of numerous people to act.
Choosing the Right Structure
Ultimately, choosing the best management structure for a new LLC will depend on the business goals and preferences of its members. Regardless of whether the LLC is member-managed or manager-managed, members have the ability to tweak and adjust the particularities of either system in their negotiation of the Company Agreement (called an Operating Agreement in Delaware). For over 30 years, BoyarMiller has worked with entrepreneurs and business owners in structuring LLCs and other business entities – listening to its clients’ needs, providing advice and assistance in selecting the entity type best suited for those needs, and creating and documenting the appropriate structure.