Every limited liability company, or LLC, is created under state law in the state where the LLC is located. The general purpose of LLC laws is to give business owners the opportunity to create a legal entity that combines the best aspects of a corporation with that of a partnership. This combination gives LLC owners personal liability protection from the debts of the business and flexibility to adopt a management structure that best suits their needs.
LLC Ownership and Formation
The owners of any business are generally referred to as principals, regardless of how the business is structured. For an LLC, the term "member" is used in all state LLC laws to refer to the LLC's owners or principals. To form an LLC, the members must file the appropriate document -- usually called the articles of organization or certificate of formation -- with the state office responsible for overseeing LLCs. Some states require the members to specify in the formation document whether the LLC will be managed by all members or whether the members will appoint one or more managers for the LLC.
Operating Agreement
All state LLC laws permit the members of an LLC to adopt a written operating agreement that specifies the rights and obligations of the members, as well as the organizational structure of the LLC's business operations. Only a few states, such as New York and Missouri, require every LLC to have an operating agreement. For an LLC with a management structure that uses several managers, a written operating agreement can be useful in clarifying the roles and authority of each manager. The operating agreement can also specify contingency plans regarding management authority in situations where a manager may resign, be fired or is otherwise unavailable to manage the LLC.
Member-Managed LLC
A member-managed LLC is structured to give decision-making authority to each member regarding the LLC's business operations. State LLC laws generally consider an LLC to be member-managed, unless the members take the required action to indicate otherwise. Disagreements among members regarding business operations are resolved by a majority vote of the members. A member-managed LLC would not have use for titles, such as president or chief executive officer, that are typically used to indicate who has primary authority for a company's day-to-day business operations.
Read More: Can an LLC Be a Member of Another LLC?
Manager-Managed LLC
In situations where not every member of an LLC is qualified or available to manage the day-to-day business operations, it is preferable for the members to appoint one or more managers to run the LLC’s business. An LLC manager can be, but is not required to be, an LLC member. Regardless of membership, the manager’s role is limited to day-to-day management and control of the LLC’s business. The role of an LLC manager is analogous to the role of a president of a corporation. It is up to the members whether to use the title “president” or “manager” for a sole manager. For LLC’s with more than one manager appointed with differing responsibilities and levels of authority, the members may need to use titles such as president, vice president or treasurer to designate the chain of command for business operations.