Forming a limited liability company (LLC) allows you to choose between two options for how you manage your business. The owners of an LLC are called “members,” and those members have a choice. Their LLC can be member-managed or manager-managed.
In this article, we’ll discuss the manager-managed LLC option and how it differs from a member-managed LLC.
What is a Manager-Managed LLC?
In a manager-managed LLC, the members surrender management duties to one or more managers. A manager doesn’t have to be a member of the LLC.
One manager or a team of managers has control over the company’s daily activities instead of the members of the LLC. Like any other business, LLCs use managers to help run the company.
While some LLCs choose to have a single manager, others will employ a team of managers. These managers will act similarly to a corporation’s board of directors. In some LLCs, the members also will act as managers. In others, the LLC will hire a professional manager to run the company. There are no state laws requiring LLC members to manage their own company.
Most states require LLCs to explain their management structure in their Articles of Organization (also known as a Certificate of Formation or a Certificate of Organization). How you manage your LLC also will determine the type of Operating Agreement you’ll use for your company.
Why Should You Be a Manager-Managed LLC?
Many people forming an LLC choose to be manager-managed for the following reasons:
- Company Size: It’s more challenging to make a decision with a large group of members vs. just a few. As such, it makes more sense to have one or a few managers making the day-to-day decisions for the LLC rather than trying to get all the members together to make a decision.
- Company Structure: You can set up a manager-managed LLC with multiple managers to look and act like a traditional board of directors in a corporation. This can prove very valuable for owners who prefer the structure of corporations, but want the flexibility and ease of an LLC. The Operating Agreement should clearly define the roles and responsibilities of the members if an LLC is member-managed and both members and managers if an LLC is manager-managed.
- Investors or Passive Members: Some LLCs may want to take on investors or passive members at the time of formation or sometime in the future. Investors or passive members can be members of a manager-managed LLC, but they don’t need to be managers and, therefore, have no say in the day-to-day management of the company. If an LLC is member-managed, its investors could have the opportunity to participate in the management of the LLC based on the Operating Agreement.
Are LLC Managers Employees?
In most cases, the members of your LLC are considered owners — not employees. If one of the members of your company also acts as a manager, it’s possible for that individual to receive employee compensation.
If a member is employed as a manager, this role will remain separate from his or her role as an owner of the company. You should define this distinction in either your company’s Operating Agreement or in the employment agreement when hiring a company member as a manager.
A professional manager will always be considered an employee. Whether you hire a professional manager or allow a member to handle management duties for your LLC, you should provide them with a competitive salary and withhold federal income taxes. These taxes are deducted to fund Medicare and Social Security programs.
Member-Managed LLC vs. Manager-Managed LLC
When choosing between the two types of LLC management structures, you should weigh several factors to determine the best fit for your business.
Many LLCs are formed because two or more individuals actually want to work together in a business. In this case, a member-managed LLC probably makes sense.
Note that the limited liability afforded to LLC members covers both managing members and non-managing members. Only LLC members, however, pay self-employment taxes related to the company; non-managing members aren’t subject to this tax.
When forming an LLC, choosing its management structure is among the most important decisions you’ll make because it affects the daily operations of the business and also can have tax implications. We recommend you seek assistance from an experienced professional before filing any documents with the state to help you get you started.
Manager Managed LLC FAQ
What does a manager-managed LLC mean?
This means your LLC appointed a manager to oversee its daily operations. See above for more details.
Should my LLC be member-managed or manager-managed?
That depends on your LLC’s ownership and preferred management structure. For more information on the reasons to choose a member-managed or a manager-managed structure, see our Member-Managed vs. Manager-Managed LLC article.
Is a managing member an owner?
Yes. A managing member is both an LLC owner and someone who handles the daily operations of the company.
Can an LLC have two managing members?
Yes. LLCs can have as many managing members as desired. But, it’s a good idea to outline the specific roles and responsibilities of those managers in the LLC’s Operating Agreement.
Should a single-member LLC be member-managed or manager-managed?
In most cases, single-member LLCs choose the member-managed structure. But, some situations do exist in which creating a manager-managed, single-member LLC makes sense. For example, a single-member LLC might operate a store that needs a manager to handle daily business operations like overseeing customer service or hiring employees.
Does an LLC manager get paid?
Yes. As an employee of the LLC, a manager will receive a salary. But, they won’t receive any profit distributions as a member. LLC members who act as managers receive regular payment for their services called “guaranteed payments.” LLCs can treat guaranteed payments like salaries as deductible business expenses because guaranteed payments also serve as regular income to the member recipient.
How do I change managers for my LLC?
You can change managers with the agreement of your LLC members. The process will depend on the rules stated in your LLC’s Operating Agreement.