I get this question a lot from people looking to form LLCs, especially when there’s just a single owner, or only 1-2 owners. There are some neat things you can do with a manager-managed LLC … if you know the tricks!
In a member-managed LLC, everyone gets an equal say … on everything. If you’ve got more than 2 members, that means a lot of people potentially out there acting on behalf of the LLC. Remember, in a member-managed LLC everyone can sign checks and everyone can sign contracts …
In a manager-managed LLC, you have established a two-level system. The managers are the people/entities that have control over the business operations of the LLC. They’re performing the same actions as the General Partner in an LP would, or the Officers in a Corporation. The members in this situation are passive, and act like shareholders or limited partners. They don’t have the right to sign checks or enter into contracts … making this a really great structure where you’ve got people who want to be very active in a business, and others who just want to go along for the ride.
It’s a great structure for a family, where Mom & Dad want to grow the business and involve the kids, passively, but don’t want the kids to be selling the business’s assets to buy new xBox games! In that sense you could use it like a limited partnership – but to be fair, the law around LLCs is nowhere near as settled as it is around LPs, where the General Partner has rock-solid control over how the LP operates.
I also like manager-managed LLCs for future growth. If you are looking at expanding a business down the road and need new capital, and your funding source won’t settle for just a good loan rate, you can bring in that funding source as a member. They get the equity interest they are looking for, but without also being a named Manager, you still have control over how the business is run.