Can a Limited Liability Company (LLC) Have Another Corporation or LLC as Its Manager?

A key aspect of running a Limited Liability Company (LLC) is the management structure. Many LLCs choose to have another corporation or LLC as their manager, providing various benefits and potential challenges. This article will explore the possibility of having another entity manage an LLC, the advantages and disadvantages, and the legal considerations involved.

Can an LLC Have Another Corporation or LLC as Its Manager?

Yes, a Limited Liability Company (LLC) can indeed have another corporation or LLC as its manager. This arrangement is known as a management company agreement. The operating agreement of the LLC typically specifies that management responsibilities are delegated to another entity, which can either be another LLC, a corporation, or even an individual.

Benefits of Using a Management Company Arrangement

The use of a management company can bring several advantages to an LLC:

Flexibility in Management Structure

Having another corporation or LLC as the manager provides flexibility in the management structure. This can be particularly useful for organizational purposes, such as leveraging the expertise of the managing entity. It allows for a more specialized approach to managing the LLC’s affairs.

Professional Management Services

Professional management services can be provided by the managing entity, which the members of the LLC may not be able to offer themselves. This can be especially beneficial if the managing entity has specialized knowledge in particular areas, such as accounting, legal, or operations.

Cost Savings

Sharing resources with the management company can also help the LLC save on costs. By leveraging the existing infrastructure and expertise of the managing entity, the LLC can reduce overhead and administrative expenses.

Potential Drawbacks of Using a Management Company Arrangement

While there are significant benefits to using a management company arrangement, there are also some potential downsides:

Divided Control and Management

One major drawback is the potential for divisions within the LLC between the members and the management company. This can create a tension between the decision-making processes led by the members and those led by the managers.

Increased Costs

The management company arrangement can increase the LLC’s costs, especially if the managing entity charges fees for its services. These fees can add up, impacting the overall profitability of the LLC.

Control and Management Complexity

Holding the LLC to account can become more complex when a management company is involved. Members may find it more difficult to directly control and manage the LLC’s affairs, as many decisions are made by the appointed managers.

Leveraging the Strategy: Owned Management Corporation

While it is possible for you to own the corporation that acts as the manager of the LLC you also own, this strategy can be complex. Here are a few points to consider:

Added Layer of Protection

Using a management corporation can provide an additional layer of protection against lawsuits. If the manager is an individual, they might be named in a lawsuit, potentially paralyzing your personal finances. By setting up a separate entity, the impact of any potential legal issues is more contained.

Banks and Legal Formalities

Some banks might require that the signer’s name is in state records as the manager or member. If you are the owner of the management corporation, you will need to ensure that the LLC can operate with this distinction. You may need to speak to multiple banks to gain their understanding and approval.

Conclusion

Whether or not to use a management company arrangement is a decision that each LLC needs to make based on its unique circumstances. Consider the benefits of professional management and cost savings, but also be aware of the potential drawbacks, such as divided control and increased costs. Proper planning and legal compliance are essential to ensure that the arrangement meets your LLC's needs.