Understanding Member Managed vs Manager Managed LLCs in Florida

An Introduction to Understanding Member Managed vs Manager Managed LLCs in Florida

One of the essential initial decisions that must be made when forming a Limited Liability Company (LLC) in Florida is whether the entity should be managed by its members or by designated managers.

This choice not only affects the overall governance of Florida LLCs, but also the day-to-day management and operations. 

To ensure that a Florida LLC is structured with its owners’ intentions and needs, it is key that they fully understand the differences between a member-managed vs manager managed entity.

The Basics of Member Managed vs Manager Managed

Characteristics of Member-Managed LLCs

Owners of Florida LLCs are known as “members”. In a member-managed Florida LLC, all the members take part in the decision-making roles and general management of the entity.

Each member usually has an equal say in the company’s operations unless the entity’s operating agreement states otherwise.

The most common characteristics of a member-managed Florida LLC are:

1. Voting Rights: Florida statute 605.04073 states that all “member’s vote is proportionate to that member’s then-current percentage or other interest in the profits of the limited liability company owned by all members.”
2. Direct Involvement: Members of a member-managed LLC are directly involved in the regular day-to-day operations and decision-making.
3. Operational Simplicity: This structure is straightforward, especially for small businesses where all members want to be actively involved.

Characteristics of Manager-Managed LLCs

Contrary to a member-managed LLC, one or more managers are placed in charge of management responsibilities in manager-managed Florida LLCs.

A manager may or may not be a member of the LLC. This structure allows the members to assume more of a passive role in the company since third parties or another member does the general management and day-to-day responsibilities. 

The most beneficial characteristics of a manager-managed Florida LLC are: 

1. Centralized Management: A manager-managed Florida LLC has the management responsibilities vested in specifically named managers.
2. Defined Roles: These managers hold a fiduciary duty towards the LLC, which are specifically outlined in the operating agreement.
3. Flexibility for Members: Manager-managed LLCs allow Members to take on a more passive role in the company and focus on their roles such as investors or strategists.

Legal Framework in Florida

In Florida, LLCs are governed by the Florida Revised Limited Liability Company Act (FRLLCA), codified in Chapter 605 of the Florida Statutes, which provides detailed provisions regarding the formation, management, and dissolution of LLCs.

Relevant Florida Statutes

1. Management of a Limited Liability Company (Florida Section 605.0407): This section of the statute specifically deals with the management structure of an LLC and distinguishes between member-managed and manager-managed entity structures. Some key provisions include:
   
   
   1. Unless an operating agreement states otherwise, a Florida LLC is presumed to be member-managed. Subsection 605.0407(3) states that the operating agreement must explicitly indicate that the entity is manager-managed.
   2. Similarly to partners in a partnership, each member has the authority to act on behalf of a Florida LLC.
   3. All decisions must be approved by a majority vote of the members in a member-managed LLC unless the operating agreement states differently. In manager-managed LLCs, only designated managers have the authority to make decisions or bind the LLC. These powers must be specifically set forth in the company’s operating agreement.

2. Agency Authority (Florida Statute Section 605.04074): This section outlines the authority of members and managers to bind the LLC in contractual and other legal matters, varying depending on whether the LLC is member-managed or manager-managed.

When to Choose a Member-Managed Structure

Member-managed entities are better suited in the following cases:

• Smaller groups in which all members intend to be actively involved in all aspects of the business operation and decision-making processes.
• When all members intend to have the same levels of investment in and commitment to the business and its operations.
• When simplicity is required and ease of management is preferred.

When to Choose a Manager-Managed Structure

Manager-managed entities are better suited for:

• Larger Florida LLCs with numerous members or investors who prefer a more passive role and who are not involved in the day-to-day management of the company
• Companies in which professional management with particular expertise is needed to run the company.
• When the Florida LLC requires distinction of roles to prevent conflicts and to streamline decision-making processes.

Considerations when drafting the Operating Agreement

While an operating agreement is not mandated by Florida statutes, it is a critical document that should be drafted for all Florida LLCs.

In addition to stating whether the entity is member or manager-managed, the operating agreement should define the duties and authority of the members or the managers, it should establish how decisions are made (i.e. voting rights etc.) and specify any limitations of authority.

The document should also provide for the process of replacing managers or allowing new members.

Member Managed vs Manager Managed LLCs in Florida Conclusions 

In Florida the FRLLCA provides a comprehensive framework to guide the decision between a member-managed and manager-managed LLC.

However, it is imperative that the owners/members ensure that the preset rules conform to their intentions and wishes of the company.

Understanding the legal effects of selecting between the two management types has a direct effect on the success of the business and its longevity.

For more information on how ASR Law Firm may assist with making this important business decision, contact us to learn more about our entity formation services.