Many startups and small businesses find the limited liability company (LLC) structure as their best option when forming a new business. Why? LLCs provide the liability protection of corporations and the managerial flexibility of partnerships, and, as a result, suit many different types of companies.
Once you decide to form an LLC, you must then determine the right type of management structure for your new business. One of the first decisions you’ll need to make is whether your LLC will be member-managed or manager-managed.
This brief guide will help you decide which management structure will best meet your LLC’s needs.
What are the LLC Management Structure Options?
Before forming an LLC, you should familiarize yourself with the differences between the two LLC management structures so you can choose the one most suitable for your business.
Once you decide to operate as a member-managed or a manager-managed LLC, record that decision in your LLC Operating Agreement to prevent future disputes among members.
In a member-managed LLC, all members participate in the company’s management and each typically has an equal say. The Operating Agreement for a member-managed LLC with an even number of members usually will include provisions for breaking ties when the members fall equally on both sides of an important decision.
Rights and Responsibilities of LLC Members
In a member-managed LLC, all members must vote on major business decisions. The members must reach a consensus or unanimous decision before taking any action regarding the company.
All members can act as agents in order to obtain business loans or sign contracts for the LLC, but they can’t do so without approval from the majority of the LLC’s members.
In most states, LLCs have a member-managed structure by default. Therefore, state law will consider your company member-managed if you don’t mention your LLC management structure in your Articles of Organization, Operating Agreement, or other formation documents.
Reasons to Choose the Member-Management Option
The member-managed approach works best for LLCs with just a few members who all remain actively involved in the business and generally have the same vision for the company’s trajectory.
Each member plays a role in determining the company’s fortunes. That typically makes it harder to point the finger at any one member in the event something goes wrong. On the other hand, making decisions can prove more challenging when everyone has an equal say and disagreements often can prevent the company from moving forward.
While less common, the manager-managed LLC structure can prove very useful if you want your startup to run more like a corporation. In manager-managed LLCs, the owners exercise their control by voting on key company issues rather than taking an active role in the company’s daily operations.
Rights and Responsibilities of LLC Managers
The managers of a manager-managed LLC can include employees with no ownership interest in the company or one or more of its members, but not all of them. Their management duties include making key decisions and overseeing the LLC’s transactions, setting guidelines for running the business, and hiring employees.
Members who don’t actively manage the company have the same status as passive partners in a partnership. They aren’t involved in routine decisions regarding the company’s operations and they can’t sign a contract that’s binding on the LLC.
Reasons to Choose the Manager-Management Option
If your business has vast operations or a relatively large number of owners, it’s impractical for all members to take an active role in each decision regarding the company’s management. Instead, a manager-managed LLC has the ability to respond quickly to changing economic conditions and act without heavy administrative burdens. This also allows the members to recruit the help of outside counsel and non-members with specific areas of expertise when making decisions.
Generally, the Operating Agreement of a member-managed LLC must list all of its members. That means the members of manager-managed LLCs have more anonymity.
In certain cases, LLCs may have members with no interest in taking an active role in the business. A manager-managed LLC makes it possible to appoint one or more managers to handle the company’s affairs, leaving other members free to maintain a passive role.
Why Define Member Roles in Your LLC Operating Agreement?
While an Operating Agreement isn’t normally required under state statute, it’s highly recommended. This document allows an LLC’s members to explicitly define the roles of each member — particularly member managers. It also can state the LLC’s goals and mission as well as outlining provisions for adding new members and buying out current ones.
Each LLC member gets to vote on the Operating Agreement with their vote corresponding to their percentage share of ownership. This means some members’ votes count more than others based on their ownership stake in the company. Members also must vote on any fundamental changes facing the LLC, such as a merger or liquidation, or to change its tax status to that of a corporation as allowed under Internal Revenue Service (IRS) regulations.
In most circumstances, the IRS considers LLC members as owners vs. employees. If one member of an LLC also acts as a manager, however, it’s possible for that individual to receive employee compensation.
If an LLC member serves as a manager for the company, this role will remain separate from his or her role as an owner. Make sure you define this distinction in either your LLC Operating Agreement or in the employment agreement when hiring a company member as a manager.
The IRS will always consider a professional manager as a company employee. Whether you hire a professional manager or allow a member to handle management duties, make sure you provide them with a competitive salary and withhold payroll taxes.
Member Managed vs Manager Managed LLC FAQ
What does a member-managed LLC mean?
This means your LLC’s members manage the business. See the Member-Managed LLCs section above for more details.
What does a manager-managed LLC mean?
This means your LLC appointed a manager to oversee its daily operations. See the Manager-Managed LLCs section above for more details.
Should my LLC be member-managed or manager-managed?
That depends on your LLC’s ownership and management structure. For more information on the reasons to choose a member-managed or a manager-managed structure, see the What Are the LLC Management Structure Options section above.
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.
How are the member managers treated for tax purposes?
An LLC’s member managers remain subject to self-employment taxes.
Is there a director-managed LLC option?
Some states, such as Tennessee, provide a third type of LLC structure: the director-managed LLC. In a director-managed LLC, the board of directors has the power to make decisions for the business. If the LLC has one director, that person will make the decisions. If the LLC has several directors, then a majority of the directors must agree on any business changes or decisions before taking action. A director doesn’t have to be a member of the LLC, enabling the LLC to have non-owner decision-makers.
Can I change from a member-managed to a manager-managed LLC structure?
Yes. LLC members can change the management structure of their company as long as their LLC Operating Agreement includes a statement that covers such an action.
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 on my LLC?
You can change managers with the agreement of your LLC members. The process will depend on the rules stated in your LLC Operating Agreement.