One of the most consequential decisions a Mississippi LLC faces at formation is whether to adopt a member-managed or manager-managed structure. This choice affects who has the authority to bind the entity, how fiduciary duties are allocated, and how day-to-day operations are governed. While the Revised Mississippi Limited Liability Company Act provides default rules for both structures, the operating agreement ultimately controls, making it essential that the chosen management structure be carefully documented and understood by all parties.
Member-Managed: The Default Rule
Under the Revised Mississippi Limited Liability Company Act, an LLC is member-managed unless the certificate of formation or the operating agreement provides otherwise. In a member-managed LLC, each member has equal rights in the management and conduct of the company's activities. Each member is an agent of the LLC and has the authority to bind the entity in the ordinary course of business.[1]
The member-managed structure works well for small LLCs with a limited number of owners who are all actively involved in the business. When all members are participating in daily operations, giving each member the authority to act on behalf of the entity simplifies decision-making and eliminates the need for a separate management layer. Decisions in the ordinary course of business can be made by any member, while matters outside the ordinary course generally require the consent of a majority of the members.
Manager-Managed: Centralized Authority
A manager-managed LLC separates ownership from operational control. The members elect or appoint one or more managers who are responsible for managing the company's activities. Members who are not managers generally do not have the authority to bind the entity and are not involved in day-to-day management decisions unless the operating agreement provides otherwise.[2]
The manager-managed structure is appropriate for LLCs with passive investors who contribute capital but do not wish to participate in management, for entities with a large number of members where giving each member agency authority would be impractical, and for situations where professional management expertise is needed. Managers may be members, non-members, or a combination of both.
Fiduciary Duties Under Each Structure
The management structure directly affects who owes fiduciary duties to the LLC and its members. In a member-managed LLC, each member owes fiduciary duties of loyalty and care to the LLC and the other members. The duty of loyalty generally requires members to account for any benefit derived from the conduct of the company's activities, to refrain from dealing with the company as an adverse party, and to refrain from competing with the company. The duty of care requires members to act with the care that a person in a like position would reasonably exercise under similar circumstances.
In a manager-managed LLC, these fiduciary duties are owed by the managers rather than by the members in their capacity as members. Non-managing members generally owe only the contractual obligation of good faith and fair dealing. This distinction can be significant in disputes, as it affects the standard of conduct to which different parties are held and the remedies available for breach.[3]
Operating Agreement Considerations
Regardless of which management structure is chosen, the operating agreement should address several critical issues. These include the specific powers and limitations of managers or managing members, the procedures for appointing and removing managers, the voting thresholds for major decisions such as taking on debt, selling assets, or admitting new members, and the compensation, if any, to be paid to managers for their services.
The operating agreement can modify the default fiduciary duty provisions within the limits set by the statute. Mississippi law permits the operating agreement to identify specific types of activities that do not violate the duty of loyalty, to alter the duty of care so long as it is not unreasonably reduced, and to specify the method by which the members or managers must authorize a specific act or transaction that would otherwise violate a fiduciary duty. However, the operating agreement cannot eliminate the obligation of good faith and fair dealing.
Third-Party Considerations
The management structure also affects how third parties interact with the LLC. In a member-managed LLC, third parties dealing with any member may generally rely on that member's apparent authority to bind the entity. In a manager-managed LLC, third parties dealing with someone who is not a designated manager cannot rely on apparent authority for acts outside the ordinary course of business. This distinction can create practical complications when a member-managed LLC wants to limit a particular member's authority, or when a manager-managed LLC wants a non-manager member to execute a specific transaction.
Mississippi's annual report filing with the Secretary of State requires the LLC to identify its management structure and list either its managers (for manager-managed LLCs) or at least one member (for member-managed LLCs). This public disclosure provides notice to third parties of the entity's management structure, though it does not replace the need for careful due diligence in significant transactions.
Choosing the right management structure at formation, and documenting that choice clearly in the operating agreement, prevents ambiguity and reduces the risk of disputes as the business grows and evolves. Business owners considering LLC formation or restructuring should evaluate their specific needs and consult with legal counsel to determine which structure best serves their objectives.