Biz Talk: Management by Default

When we decided to register CoffeeShop Treats* as a limited liability company (LLC), we opted for a member-managed structure instead of a manager-managed structure. We did this because all members wanted to have their say in all business decisions, and we wanted to avoid having non-manager membership interests treated as securities.

If you set up a manager-managed LLC, it is likely that the ownership interests of the non-managing members will be treated as securities under state and federal laws because these non-active members will be making a profit from the efforts of others. This qualifies their membership interests as securities.  

Moreover, California statutes require that an LLC be able to prove that all of its members actually participate in the company management and operations on a regular basis.

Because of these rules and constraints, we were all very cautious about our moves and decisions at the expense of timeliness. Despite the clear-cut job descriptions and responsibilities of elected officers, decision making was very slow and had to be by consensus to get everybody to participate actively. Speed of execution, therefore, became a problem.

While planning cannot eliminate all kinds of risks and potential problems, it can minimize costly mistakes. But when things don't go exactly as planned, tough decisions have to be made. This requires critical decision-making skills, which come from an entrepreneurial mindset and years of experience. 

Unfortunately, all of our members didn't have both of those qualities. The problem with getting a consensus is that it takes long discussions and debates before everybody can agree. This can be very counterproductive to small business start-ups such as ours.

Ideally, one officer should be designated as the chief decision-maker for strategic plan implementation. This person should be the most actively involved member of the organization and should be familiar with the industry and know a lot about the business. This should not necessarily be the person with the highest percentage of membership interest.

After mapping out all pre-opening activities with schedules and responsibilities, the officer in charge of buying our kitchen equipment during an auction didn't show up for the event. Unfortunately, those auctions happen every two weeks, which is a long wait for start-ups like ours, which had already started paying rental fees. 

When that officer convinced the rest of the members to wait another two weeks, it was already too late. By then we could no longer find the equipment we needed.

Since we didn't know how long we'd have to wait until the next auction offering the equipment we needed, we decided to purchase the equipment brand new, direct from manufacturers. This caused further delays due to shipping schedules of out-of-state suppliers — two to six weeks of waiting time. 

We learned a harsh lesson. Essentially, bureaucracy brought our company down even before we opened.

For a start-up company like this, it's not advisable to have too many managers running the business, especially when some are not competent enough to be managers and decision-makers. It's better for these people to stay as investors or silent partners.

Every company is only as good as its managers. Not every owner is capable of making tough business decisions. For small start-up companies with more than one manager, getting a consensus is unnecessary and counterproductive. 

Successful entrepreneurs have decision-making skills that combine creativity, quick thinking, risk taking and wisdom from experience. These special skills allow them to grow their companies faster and bigger that most business start-ups. When starting your own business, study them and learn from their style and experience.

*CoffeeShop Treats LLC was a coffee and dessert shop in San Leandro. It was sold in 2007.