Member-Managed LLC vs. Manager-Managed LLCs

When you form a South Dakota limited liability company (“LLC”), you will need to decide how your LLC will be managed. LLCs have two different possible management structures. 

First, you can choose to have a member-managed LLC where all the members (or owners) participate in running the business. 

Second, you can have a manager-managed LLC where only designated members, or certain nonmembers/outsiders, or a combination of members and nonmembers are given the responsibility to run the business. The other members in a manager-managed LLC are passive investors who are not involved in business operations.

In South Dakota, A Member-Managed LLC Is The Most Common Choice

Most people who set up an LLC in South Dakota choose member-management, meaning that all the members share responsibility for the day-to-day running of the business. This approach is more common in part because most LLCs are small businesses with limited resources and they don’t require a separate management level to operate.  Unlike corporations, LLCs have a streamlined organizational structure, without officers or boards of directors.  As such, the LLC form is often chosen by people who want to be directly involved in managing and operating their business.

If you and the other members of your LLC want to run your own business - actually make and sell products, take orders, provide services - then you will probably want a member-management structure for your LLC.  For example, if your LLC is a bakery and all your LLC members want to play an active role in the business -- crafting recipes, baking goods, hiring employees, opening and closing the shop -- then you will want to operate the LLC as member-managers.

In Some Circumstances, A Manager-Management LLC May Be Better

In some situations, a manager-management structure may be better.  The most common example is when some members only want to be passive investors in the business.  These owners often feel more comfortable if the LLC delegates management responsibilities to one or more other members (or nonmembers).

Two other situations where LLC owners may prefer a manager-management structure are: (1) when your business or ownership is too large, diverse, or complex to efficiently allow for sharing management among all members; or (2) when some of your members are not particularly skilled at management. (Sometimes, of course, these two situations go together.) Delegating management to a smaller group of people or just one person can be an effective way of balancing the varied skills and interests of multiple LLC members. It can also ensure more competent management of the business.

While LLCs that appoint managers often rely on one or more of their own members to fill the role, you can hire a nonmember as manager.

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