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Should Your San Diego LLC be Member-Managed or Manager-Managed?
Under the California Corp. Code, § 17701 et seq., when you form a Limited Liability Company (“LLC”) to run your San Diego business, you choose how the LLC is managed. The three choices are:
- Single-member LLC
- Member-managed — managed by one or more of its members or
- Manager-managed — the LLC is managed by some third person hired to manage the LLC
Obviously, for the single-member LLC, the LLC is managed and operated by its single member. When the LLC has multiple member/owners, then the LLC will have to choose whether to be member-managed or whether to be manager-managed. Consulting beforehand with an experienced San Diego corporate attorney can help. Here are some considerations for making the choice.
San Diego Corporate Law: Considerations With Respect to Owner Intent and Desires
Obviously, every San Diego and California business is unique. The intent and desires of the owners will play a large role in whether to choose member-management or manager-management. Member-managed LLCs are probably the most common choice for these reasons:
- Desire by members/owners to be actively involved in the running the business
- Desire by members/owners to handle the day-to-day business
- Desire to share responsibility for management decisions
- Desire to be employed by the LLC
On the other hand, depending on the owners and the type of business, the members/owners may desire the manager-managed form. The “manager” might be a member, but might also be an outside third party. In general, the typical reasons for choosing the manager-managed form is a desire to avoid being involved in the day-to-day operations; that is, an expectation that the business is a passive investment.
San Diego Corporate Law: Other Considerations
Aside from the desires of the member/owners, there are other considerations in making the choice.
Size Matters
For obvious reasons, smaller LLCs are often better suited to be member-managed. In general, if membership exceeds about 10 members, running the business will become too cumbersome for everyone to be involved in the day-to-day operations. Thus, beyond a certain size, manager-managed is the correct choice. Note that family-run LLCs might be an exception; but, in practice, even if formally a member-managed LLC, the family may generally “defer” to one or a few family members to run the LLC.
Type of Business Matters
Another factor is the type of business. Certain types of businesses are better candidates for being member-managed. For example, when the business — such as retail — does not require specialized training or knowledge, a member-managed structure is ideal. By contrast, something like oil and gas exploration/exploitation might be better suited to a manager-managed structure because the manager needs a certain level of expertise.
Equality of Experience/Knowledge Matters
Along the same lines, another factor is whether the members have similar levels of experience and knowledge about the running of the business, nature of the market, etc. If the members share a similar level of experience, then a member-managed form is a good choice; otherwise a manager-managed form might be better. Again, retail is a good example of the former, while oil and gas exploration is a good example of the latter.
San Diego Corporate Law: Importance of a Well-Crafted Operating Agreement
How to structure your LLC is important since it will directly affect how your business is run and whether your LLC is a commercial success. Your LLC’s operating agreement is also very important since the operating agreement will need to track the choice made with respect to member-managed or manager-managed. One type of operating agreement might be more concise; the other might need many more details since the members will have little or no control. The operating agreement delineates the rights, responsibilities, and expectations of the members/owners. A well-crafted operating agreement is essential.
Contact San Diego Corporate Law
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for San Diego and California businesses including setting up your LLC, drafting Operating Agreements suited for your needs, and reviewing/drafting any and all contracts needed for running your business. Mr. Leonard has been named a “Rising Star” three years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard can be reached at (858) 483-9200 or via email.
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