Which Flavor is Your LLC?

Business Entities
types of LLCs

Limited liability companies come in two flavors. What’s the difference between them? It’s who is authorized to make the company’s decisions. In member-managed companies the members have this authority; in manager-managed companies the managers have it. It’s important to know which type of LLC your company is so that important decisions will be authorized by the correct people and that contracts will be signed by the people who actually have authority.

This distinction is so important that it’s one of the few pieces of information that are required to be included in every LLC’s articles of organization. But it’s often overlooked — or misunderstood — by business owners.

First of all, what are “members” and what are “managers”? Members are an LLC’s owners. I see a lot of contracts signed by the “owner,” but this is an incorrect description of the “owner’s” true role. LLCs don’t have owners — technically speaking — although we often use the term colloquially. In fact, the word “owner” didn’t appear in the Missouri Limited Liability Company Act until it was amended in 2013 to provide for series LLCs. Now the word occurs a single time and is used colloquially and not in a technical sense.

The people who own an LLC’s equity are its members. Members are roughly analogous to the shareholders of a corporation. In a member-managed LLC, the members are what the Limited Liability Company Act refers to as the “authorized persons” who have authority to make all the company’s decisions and sign the company’s legal documents. So if you check the “member-managed” box in your company’s articles of organization when you’re creating the company, the company’s members have authority to make decisions and bind the company.

If an LLC is manager-managed, the “authorized persons” who have authority to make decisions for the company and sign its legal documents are its managers. Unless they are specifically authorized under the company’s operating agreement or in some other way, the LLC’s members don’t have this authority. So if your LLC is manager-managed, its manager or managers will make important decisions, and they are the appropriate people to sign the company’s contracts.

The term “manager” sounds like the person’s status is less of a big deal than it actually is. Right now, for example, I’m sitting in a St. Louis Bread Company restaurant (known as Panera Bread to the world outside of St. Louis). When I think of a company’s “manager,” I think of the shift manager who’s behind the counter making sure everything runs smoothly through the morning rush. But in fact, an LLC’s managers are more similar to the company’s board of directors and c-suite officers combined. They have a lot of authority.

Why is this important? For one thing, when a company is manager-managed, its members don’t have authority to bind the company unless they are specifically given authority. In fact, the Missouri Limited Liability Company Act says of manager-managed LLCs, “No member, acting solely in his capacity as a member, is an agent of the limited liability company.” So if your company is a manager-managed LLC, you don’t have the authority to sign a contract on behalf of the company as its “member.” If you do so, that could call into question whether the contract is actually binding. If you are in fact the company’s manager, you should sign the contract as “manager,” not as “member” or “owner” or “founder.” See my post How to Sign a Contract for more detail and example signature blocks.

So, to sum up, LLC’s come in two flavors. Whether your company is member-managed or manager-managed determines who can make the company’s important decisions and sign its legal documents. It’s prudent to make sure the appropriate people make decisions and sign documents for your company.

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