Founding an LLC with friends, family members, or business partners is an exciting decision. But, before you’re ready to hang the “Open For Business” sign, you need to decide who will run the daily operations.
You have two choices for your LLC management structure: member-managed or manager-managed. Read the following important information to help you decide how to operate your business.
LLC Management
A limited liability company (LLC) is a legal business entity created by owners, called “members,” to conduct business. A professional limited liability company (PLLC) is a type of LLC whose members are licensed professionals.
An LLC founded by one member is known as a single-member LLC; if there’s more than one member, it’s called a multi-member LLC.
With single and multi-member LLCs, members must decide between two possible management structures for their business: member-managed vs. manager-managed. Some LLCs may also choose to implement a more formal structure, such as adding a board of directors or other governance options, depending on their needs.
Whoever is in charge of the management of the company will have the power to make a range of critical decisions:
- Sign agreements and enter legally binding contracts
- Manage business bank accounts, including opening and closing accounts
- Manage staff, including hiring and firing
- Take out business loans
- Buy and sell business assets such as equipment and vehicles.
Member-Managed vs. Manager-Managed LLCs
Before forming an LLC, it’s essential to understand the differences between the two LLC management structures to choose the one most suitable for your business.
Once you’ve chosen to operate as a member or manager LLC, record your decisions in your LLC or single-member LLC operating agreement to prevent future disputes between members.
What is a member-managed LLC?
In a member-managed LLC, all members share responsibilities and have a say in daily operations and the organization’s long-term plans.
All members are required to vote on significant business decisions. A consensus or unanimous consent must be reached before actions can be taken.
All members can act as agents to obtain business loans or sign contracts for the LLC, but they can’t do so without approval from most members.
In the majority of states, LLCs are member-managed by default. Therefore, if you don’t mention your LLC management structure in your articles of incorporation, operating agreement, or other formation documents, your company will be considered member-managed by state law.
What is a manager-managed LLC?
In a manager-managed LLC, the members appoint one or more managers to handle the organization’s daily operations and administrative responsibilities. If a member is appointed as manager, they are referred to as a managing member. However, not all members can act as managers at the same time.
If no members are interested in managing the LLC, an external manager (someone who doesn’t own any portion of the LLC) can be hired to run the business operations. Depending on your state’s requirements, you can even appoint a third-party entity, such as another company, as manager of your LLC.
What’s the Difference Between Member-Managed and Manager-Managed?
There are some critical differences between member-managed and manager-managed, along with some benefits and some cons:
Advantages of Member-Managed LLC
- All members of the LLC can input into management decisions
- Straightforward structure – ideal for small businesses
- Fewer limitations for members – ensuring members can carry out business without any blockers or delays
Disadvantages of Member-Managed LLC
- Managing an LLC can be time-consuming, resulting in members lacking time to make critical strategic decisions.
- If there are multiple members, keeping on top of all decisions and keeping financials and legalities in order can become challenging.
Advantages of Manager-Managed LLC
- Ideal for passive members who don’t want an active role in the company – allows investors to invest in the business passively.
- Allows managers to make quick decisions without needing approval from every member – meaning they can respond quickly to changing economic conditions
- Centralizes authority for business decisions
- Can recruit a manager experienced in the industry of the LLC or someone with abilities that can enormously benefit the company
Disadvantages of Manager-Managed LLC
- All owners do not get a say in management decisions
- Managers require high salaries, which can take a toll on small or new businesses
- Thorough documentation is required to outline the authority of the manager
Managing member vs. member: what’s the difference?
Managing-members can:
- Make decisions regarding daily operations and act as an agent who can enter the LLC into contractual agreements, whereas non-managing members cannot.
- Vote on all business decisions. While non-managing members can vote, they’re not required to.
Member-Managed vs. Manager-Managed Tax Implications
One benefit of an LLC, whether member- or manager-managed, is that it’s treated as a partnership for federal and state income taxes.
Instead of the organization paying taxes, the profits are distributed among the members and recorded on their income taxes — per the distributive share terms outlined in the LLC operating agreement.
- In a member-managed LLC, all members must pay the current self-employment tax of 15.3% (12.4% for Social Security and 2.9% for Medicare).
- In a manager-managed LLC, non-managing members are not subject to the self-employment tax (although other taxes may apply depending on the structure of your LLC)
Remember that multi-member LLCs are treated as a partnership for tax purposes by default if you do not elect to be taxed differently. Single-member LLCs, however, are taxed as sole proprietorships unless they elect otherwise.
The tax implications of running an LLC are complicated — consult an accountant to determine how your LLC will be taxed and the implications for managing and non-managing members.
When to Choose a Manager-Managed LLC
Most LLCs are member-managed, but some businesses benefit from a manager-managed structure.
If your LLC has any of the following, you may want to consider a manager-managed structure:
1. Your LLC has a large number of members
If your LLC has many members, appointing a manager to run daily operations is more effective. A member-managed structure requiring each member to vote on each decision would degrade your company’s ability to function efficiently and remain competitive if you have many members.
2. Your LLC has passive members
Many LLCs have passive investors who want member status but don’t want to be involved in daily operations. A manager-managed LLC allows passive investors to achieve member status but excludes them from voting, acting as agents, and managing day-to-day operations.
3. Your LLC members lack management experience
If one or all LLC members don’t have the necessary time or skills to manage company operations, appointing a manager is in your company’s best interest.
Document Your LLC Management Structure
Once you’ve decided between operating as a member-managed vs. manager-managed LLC, you must outline your LLC management structure in your operating agreement.
Deciding to run your own business alone or giving up responsibility to one or more members isn’t an easy decision. Clear documentation of each party’s roles and responsibilities, how decisions will be made, and how disputes will be handled is crucial to preventing legal and personal conflicts.
Member-Managed and Manager-Managed FAQs
What is a member of an LLC?
An LLC member is the owner of the LLC.
What is a manager of an LLC?
A manager of an LLC is an individual, group, or entity chosen by LLC members to oversee and manage the business’s operations. Managers can be a member or members of the LLC (member-managed) or can be from a third party.
Is the manager of an LLC the owner?
The manager of an LLC is the owner if the LLC is member-managed. If the LLC is not member-managed, then the manager is not the owner and was chosen by the LLC members to manage the company’s day-to-day operations.
