Before forming a limited liability company (LLC), you should determine the management structure of your company. There are two options: member-managed or manager-managed.
In this article, we’ll discuss the member-managed LLC option and how it differs from a manager-managed LLC.
What is a Member-Managed LLC?
The owners of an LLC are called “members.” In a member-managed LLC, the members of the LLC are the ones who officially act on behalf of the company.
This management structure is ideal for LLCs with only a small number of actively engaged owners or investors who want to hold direct responsibility for the business’s operations. Given its simplicity and the level of control it provides to the LLC owners/members, the member-managed option is a common choice for many LLC owners.
States require LLCs to specify their management structure in their Articles of Organization (also known as a Certificate of Formation or a Certificate of Organization). The member-managed option is actually the default LLC structure designation in most states. If you didn’t indicate a management structure in your LLC’s Articles of Organization or Operating Agreement, all members may be considered managers.
Why Should You Be a Member-Managed LLC?
Many people forming an LLC choose to be member-managed for the following reasons:
- Company Size: The number of LLC members is relatively small and all of them participate in the management of the company. As a member-managed LLC, you’ll get greater flexibility in how you structure your business.
- Company Structure: This is a less complicated management structure — especially for small companies. All members of the LLC participate in the decision-making process for the business. This LLC structure is referred to as “decentralized management” because the administrative power is spread out among the members rather than centralized in the hands of one or more managers.
Members of an LLC also have the right to vote. The scope of their voting rights depends on whether the LLC is managed by its members or by managers. Members in member-managed companies may vote on all matters affecting the LLC’s business and affairs.
- Investors or Passive Members: In a member-managed LLC, each member owns a percentage of the company and therefore each receives a vote on important business decisions. Each member holds the authority to make decisions on behalf of the company. However, a majority of the members must agree upon business contracts and other transactions.
Also, attracting investors tends to be more difficult for member-managed LLCs. Because most investors act as passive investors or “silent partners,” they might not want to be involved in managing the business and its daily operations. This management structure also makes it difficult to raise money from investors.
Are LLC Members Employees?
As an LLC member, you’re not considered an employee. LLC members or owners receive distributions from the company’s profits, but they’re not employees. Professional managers, on the other hand, are considered employees and do receive a salary for their work.
Although LLC members don’t receive any salaries, they hold the right to share in allocations of the profits and losses of the business. Members also have the right to share in distributions of the LLC’s assets during its existence and when it dissolves and liquidates.
Whether shared equally or based on capital contributions or some other criteria, how an LLC’s members will receive these financial distributions should be outlined in the company’s Operating Agreement.
Member-Managed LLC vs. Manager-Managed LLC
When deciding between the two types of LLC management structures, you should weigh several factors to determine the best fit for your business.
An LLC can either be a single-member LLC or have multiple members. Many LLCs are formed because two or more individuals actually want to work together in a business. In this case, a member-managed LLC is the best option.
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 the management structure is among the most important decisions you’ll make because it affects the daily operations of the business and can also have tax implications. We recommend you consult with your legal professional to determine the right structure for your business.
Member Managed LLC FAQ
What does a member-managed LLC mean?
This means that the LLC owners or members have the combined decision-making control and authority over business 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 member get a salary?
No. An LLC member or owner doesn’t get paid a salary. Instead, LLC members share in distributions of the LLC’s assets, profits, and losses. LLC members who serve 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 members for my LLC?
An LLC’s Operating Agreement may explain the grounds for — and means of — changing or removing a member. The usual method of involuntary removal is a vote by the other members followed by a buyout based on the departing member’s interest or share in the company.