How to Manage LLC Structure in 6 Steps
Forming an LLC is one thing; managing it is quite another. Limited liability companies (LLC) are the most common form of business entity in the US. They are easy to start and flexible enough to grow. Learn advanced techniques for managing the entire LLC structure, including ownership, officers, and directors.
The techniques outlined here are suitable for a single limited liability company. They are powerful when applied to a portfolio of legal entities owned by a private equity firm, investment fund, family office, or complicated business entity.
This article will cover six steps to visualize and manage an LLC structure:
- Create corporate registry
- Focus on one entity at a time
- Create direct ownership relationships
- Add LLC Managers
- Repeat steps 2 - 4 for each related entity
- Generate ownership org charts
A note about terminology For purposes of this article structure primarily means the ownership relationships to an LLC in question. The LLC structure also includes the management of the business.
There are two basic types of LLC: member-managed and manager-managed LLCs. The manager-managed LLC generally separates the roles of owners and managers of the LLC, even though in practice some of them might be the same people. This article focuses on manager-managed LLC which typically involve more elaborate structures.
The statutory term for an LLC owner is member and the term for the rough equivalent of a corporate officer is manager. However, the LLC form is quite flexible. LLCs often adopt the corporate terms officer and director in place of manager.
These steps are organized so you can work quickly at a general level and drill into the details gradually.
1. Create corporate registry
The best place to start structuring an LLC is to create a list of all the legal entities which are part of the corporate family. This list is the corporate registry. The corporate registry should contain only legal entities you control.
What does it mean to control an entity? Control in the legal sense includes financial or management control of the entity. For purposes of entity management, though, we simply mean that the entity is in the corporate family and that you are responsible for the entity’s compliance and filings.
Skipping the registry While this step is not strictly necessary (you can skip to the second step), it will make creating the corporate structure quicker with better data integrity.
Related v. Unrelated Legal Entities
It is helpful to distinguish between related and unrelated entities. Related entities share a broader corporate family. Unrelated entities are individuals or companies which have some ownership relationship to our LLC but are not part of the corporate family.
To illustrate, imagine that you form an LLC called creatively “NewCo, LLC”. NewCo has two owners: your parent company, “ParentCo, Inc.” and an outside investor, “Giant InvestCo, LLP”.
Your corporate registry includes NewCo, LLC and ParentCo, Inc., but not Giant InvestCo, LLP. Giant InvestCo is unrelated because we do not manage it as a legal entity. It is simply an investor in NewCo.
To decide whether to add an entity to the corporate registry:
Individuals v. Legal Entities
The Limited Liability Company Model Act allows both individuals or corporate entities to own membership interests.
To manage our corporate structure though, we need to distinguish between individuals and legal entities.
Individuals are not owned, nor do they have expiration dates (at least not legal expiration dates), so we place them in the unrelated entities bucket. Individual members in the LLCs should appear on the org chart for the LLC, but not in the corporate registry.
Additional legal entity data
As you add data to your corporate registry, it will be useful to add additional metadata to the entity record, but that is beyond the scope of this article.
2. Focus on one entity at a time
Once you have the corporate registry complete, you create the LLC structure. Legal entity ownership structures easily become complex. It is best to break the task down into manageable units.
In this case, we focus on the LLC in our corporate structure. We will build the ownership structure around this entity. Using entity management software will allow us to create more linkages automatically.
3. Create direct ownership relationships
LLC ownership structures can become complicated quickly. The best way to leverage a data-driven entity management system is to create just direct ownership relationships for the LLC entity in focus.
With one entity in focus, we add the immediate parents. Immediate or direct parents are those individuals or other legal entities owning membership interests in the LLC.
When we create the ownership relationship between a parent entity and the LLC in focus, we only want to link the parent to the LLC. We do not want to recreate the parent. That is why data-driven entity management is imperative. Our entity management software should crawl the relationship data to generate the complete org chart automatically.
If the LLC has direct subsidiaries, we can add those too. Like parents, we should not add entities which are grandchildren or great-grandchildren with the LLC in context.
4. Add LLC Managers
Management is the second pillar of the LLC structure. If your LLC only has a few managers (maybe just the founding owners), it is still helpful to create a list of management titles or roles along with terms of service.
There is no requirement that LLCs have officers unless their organizational documents create those roles.
Officer roles for limited liability companies are often modeled on corporations:
- President and Chief Executive Officer (CEO),
- Treasurer or Chief Financial Officer (CFO), and
Limited liability companies are not required to have a Board of Directors. Conversely, there is nothing to prevent an LLC from creating a Board of Directors. If your LLC has a Board of Directors, then keeping track of directors, much like officers, is important. Simply capture the same type of information: name, title/role, and term of service.
In the event your LLC has formal subcommittees and related assignments, then you will want to track does assignments for each director.
Terms of Service
Term of service for an LLC manager refers to the period when the person was in a particular role. So you want to know that Angelica Smith was Treasurer from February 2, 2016, to August 15, 2018.
When you have terms of service for each officer over the life of the legal entity, you can analyze who was in charge when important decisions were made or events happened.
5. Repeat steps 2 - 4 for each related entity
Once you have finished adding direct parents, direct subsidiaries, and officers and directors to the LLC, then you should return to the corporate registry and complete at least the immediate owners for each entity in the corporate registry. Remember that only related entities will be in the corporate registry. These are legal entities, not natural persons, for which you have some compliance or filing obligations that you want to track.
6. Generate ownership org charts
With all the direct ownership relationships created, we can discover the entire ownership structure surrounding our limited liability company.
Our data-driven entity management software automatically assembles the ownership structure based on the most current data available.
These steps lay the foundation for future compliance management of your legal entities.