This question applies to limited liability companies (or LLC’s), not corporations.
This is a very common question, and the answer is surprisingly not a legal one. It’s a business question.
In a “Member Managed” LLC, the Members make all the day-to-day management decisions of the company. Typically, this is the most common form of LLC. Day-to-day management decisions means the Members can “run the business” without having to call a meeting every hour to take a vote on whether a bank account can be opened, an employee hired, and more.
In a “Manager Managed” LLC, the Members elect one or more managers, who run the day-to-day operations of the company. The Manager(s) are given very specific powers, that enables them to do things without calling a vote of the Members. Examples, include opening up bank accounts or merchant accounts, obtaining loans, hiring and firing employees, and more. Managers generally don’t make serious decisions, and instead such important decisions must go to the Members under a vote.
The Operating Agreement is very important in this regard, as it will spell out what powers are granted to the Members or Managers, without having to call a vote of the Members. Typically, powers that can be granted include:
- The institution, prosecution and defense of any Proceeding in the Company’s name;
- The purchase, receipt, lease or other acquisition, ownership, holding, improvement, use and other dealing with, Property, wherever located;
- The sale, conveyance, mortgage, pledge, lease, exchange, and other disposition of Property;
- The entering into contracts and guaranties; incurring of liabilities; borrowing money, issuance of notes, bonds, and other obligations; and the securing of any of its obligations by mortgage or pledge of any of its Property or income;
- The lending of money, investment and reinvestment of the Company’s funds, and receipt and holding of Property as security for repayment, including, without limitation, the loaning money to, and otherwise helping Members, officers, employees, and agents;
- The conduct of the Company’s business, the establishment of Company offices, and the exercise of the powers of the Company within or without the State;
- The appointment of employees and agents of the Company, the defining of their duties, the establishment of their compensation;
- The payment of pensions and establishment of pension plans, pension trusts, profit sharing plans, and benefit and incentive plans for all or any of the current or former Members, employees, and agents of the Company;
- The making of donations to the public welfare or for religious, charitable, scientific, literary or educational purposes;
- The payment or donation, or any other act that furthers the business and affairs of the Company;
- To payment of compensation, or additional compensation to any or all Members, and employees on account of services previously rendered to the limited liability company, whether or not an agreement to pay such compensation was made before such services were rendered;
- The purchase of insurance the life of any of its Members, or employees for the benefit of the Company;
- The participation in partnership agreements, joint ventures, or other associations of any kind with any person or persons; and
- The indemnification of Members or any other Person.
Typically, powers that are reserved for a full vote of the Members can include:
- The sale, exchange or other disposition of substantially all of the assets of the Company;
- The imposition of additional capital contribution requirements upon the Members;
- The filing by the Company of any voluntary petition in bankruptcy or delivery of any assignment for the benefit of creditors;
- The lending of Company funds to any person or entity, or obligating the Company as surety, guarantor or accommodation party, except that the Company shall be able to guarantee credit accounts with suppliers in the ordinary course of business;
- The incurrence of any debt on behalf of the Company, other than trade debt incurred in the ordinary course of the Company’s business;
- The investment or participation by the Company in any other entity;
- The merger or consolidation of the Company; and
- The admission of new or substitute Members or the authorization for additional Units of the Company, except as specifically provided elsewhere herein.
To keep things simple, we’ll often recommend that sole-member LLC’s simply go with “Member Managed”. For multi-member LLC’s, we also recommend a “Member Managed” LLC, unless the Members intend to actually hire a Manager, or one (or more) of the Members will be working on day-to-day activities more than the other Members, then we would recommend a “Manager Managed” LLC.