When you hear the term Chief Executive Officer, chances are you think of a large corporation.
That’s because corporations are required to have CEOs, while sole proprietorships and limited liability companies, or LLCs, are not. But the fact is that LLCs can and often do have CEOs.
State laws allow LLCs to appoint a CEO or other officers and structure management as it wishes. In fact, when forming your LLC, defining your management structure is among the key steps you’ll take. This article lays out the role of a CEO and examines whether your LLC would benefit from having one.
What Does a CEO Do?
As should be apparent from the job title itself, a CEO is a company’s top-ranking official and has the final say on everything from management to sales to strategy and beyond. The CEO oversees all operations and is responsible for implementing plans and keeping the company on course for its targets and aligned with its stated mission.
Of course, a CEO’s duties can vary widely, depending on the size of the company, operations and management structure. In a large firm, the CEO’s activities will involve high-level strategic decisions, while in a small company the CEO will likely be more hands on and involved in daily operations. In a startup, the CEO will probably “wear many hats” and be involved in finance, operations, marketing, and more.
What you may not know is that even the CEO has a boss, in a way. In a corporation, the CEO reports regularly to the board of directors, which is a corporate governing body elected by shareholders. The CEO is also expected to implement plans that aim to achieve the goals set by the board.
LLC Structure and Management
The structure of an LLC is defined in the Operating Agreement. Members of the LLC are anyone who has an ownership interest, and the number of members allowed is unlimited.
An LLC can be member-managed or manager-managed, and this will also be stated in the operating agreement. If an LLC is member-managed then a member can be CEO or president, whichever the members decide upon. If the LLC is manager-managed, then a non-member of the LLC will be brought in and appointed CEO.
CEO salaries tend to be high, so if a member has the right skills and experience, a member-managed structure often makes more financial sense.
The Operating Agreement, which is not a requirement but is highly recommended, should also specify:
- Member roles and responsibilities
- Management structure
- Who is authorized to sign contracts for the LLC
- Profits and loss distribution among members
The corporate structure can also be stated in the Operating Agreement, in the member roles and responsibilities section. The corporate structure refers to who manages which functions. In addition to the CEO, other top officers include:
- Chief Financial Officer (CFO) — manages all financial functions and oversees the comptroller, accountant, and bookkeeper. In a small startup the CFO might actually perform all the financial functions. The CFO also works closely with the CEO to create and implement strategic plans.
- Chief Operating Officer (COO) — manages day-to-day administration and operations, generally responsible for executing the company’s business plan and managing the company internally.
- Chief Information Officer (CIO) — manages the company’s IT, from internal networks to software, shared apps, drives and internet connections.
These titles can all be assigned in the operating agreement’s member roles and responsibilities.
Board of Directors
As with a CEO, a board of directors is required for a corporation but not an LLC.
An LLC can have a board of directors and usually the board is made up of the members, but a non-member board can be created, and is sometimes called an advisory board. The board, which is meant to represent shareholders, meets regularly to set policies and provide corporate oversight.
If the LLC decides to have a board, it would have authority over the company and operate within the LLC’s bylaws, which would lay out how board members are selected, how many there should be, and how often they meet.
The CEO will answer to the board of directors and be responsible for communications to and from the board of directors.
Benefits of a CEO
Having a CEO tends to create a clear decision-making hierarchy. For an LLC with multiple members, decision-making can be inefficient if no one is designated as the having the final say.
If a company has two members with 50-50 ownership, for instance, but no decision maker has been specified, a disagreement can cause conflict. Such disputes have actually destroyed established firms.
Having a defined corporate structure with clearly defined roles, authority, and responsibilities reduces the possibility of disputes and other issues. Also, a key part of a CEO’s role is strategy execution, so an effective CEO with a clear strategic vision should be able to keep the company moving in the right direction.
Hiring a non-member CEO and other officers has benefits as well. While it will increase your expenses, hiring officers with experience, knowledge, and the right skills can elevate your company and boost growth. CEOs are trained to manage at a high level, and to take necessary steps to achieve the company’s long-term goals.
If you decide to hire or appoint a CEO, all members must agree on the action and the person appointed.
A member’s influence over a decision is generally determined by their ownership percentage interest, but for an LLC with a lot of members this can get complicated.
When you form your LLC, your operating agreement should establish voting rights so that each member gets a certain number of votes based on their percentage of ownership.
While you are not required to have a CEO in an LLC, having a defined management structure and someone with decision making authority has many benefits, such as avoiding founder issues, which are among the leading causes of company failure.
Though sharing power often sounds like a good idea, co-managing without a clear hierarchy or management structure almost invariably leads to disagreements with no clear path to resolution. The wise move is to choose a sharp CEO with the skills and experience that will maximize your firm’s success.