By: Serge Filatov
I’ve written previously about sole proprietorships and general partnerships as forms of businesses for the small business owner here in San Jose and Silicon Valley. However, as mentioned before, those forms of businesses are not ideal because they expose the business owner to unnecessary liability. Instead, a small business owner should consider starting a limited liability company.
LLC’ s are often a great choice for a business owner because they can be structured almost any way you want yet they still provide liability protection. Do you want to have one person control all of the power of the company? No problem. Do you want to have the company controlled by a board of directors? Great. How about every owner voting having an equal say in the management of the company? Ok (though I wouldn’t recommend it in many circumstances). Unlike a general partnership or a sole proprietorship, the LLC is a separate entity from its owners and, under most circumstances, will shield its owners from liability for business debts.
If you choose to create an LLC, the first major issue you will have to deal with is determining the management structure of the LLC. Will it be member (i.e. owner) managed or manager-managed? A member-managed LLC is where all of the members of the LLC participate in the management of the LLC. A manager-managed LLC, on the other hand, is a situation where the members turn over the right to manage the company to one or more managers which they appoint. The manager(s) is then provided full power to run the company while the members are merely passive investors (similar to shareholders of a corporation).
A common question asked by first time clients is whether they should choose a member or manager-managed LLC. The answer to this depends heavily on the situation of the client. As a general guideline, however, one should consider a manager-managed LLC if you answer yes to any of the following questions:
Investors and Passive Owners. Will the entity have any owners who you do not want to manage the company? Will it have investors?
Size. Will the entity be too large, diverse, or complex to efficiently be able to run the business with every member having management rights?
Structure. Do you want the entity to look and feel more like a corporation or more like a general partnership or limited partnership?
On the other hand, if the LLC is only going to have a couple of members who are capable of management, then you may want to consider having a member-managed LLC. A member-managed LLC is simpler to document because, in general, you do not have to deal with determining all of the management rights and duties of the managers.
In any event, the operating agreement for an LLC, which is the operating document for the entity, needs to clearly set out the structure of the entity and how it will operate. A seasoned attorney can help you create the operating agreement and make sure that it is properly tailored for your situation.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.