Member Managed vs Manager Managed LLC

Before forming an LLC, you’ll need to 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.

Our comprehensive Member Managed vs Managed Managed LLC guide aims to help you make this crucial decision by breaking down what these management structures are and explaining who they’re best suited for.

Types of LLC

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.

We’ve broken down the important differences between each of these management structures in the sections below.

Member Managed LLC

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 member managed LLCs, all the members must vote on major business decisions, and a consensus or unanimous decision must be reached before any important action regarding the company can be taken.

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 Start a Member Managed LLC

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.

Manager Managed LLC

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 Start a Manager Managed LLC

If your business is particularly big or has a relatively large number of owners, it’s impractical for all of them 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.

Note: While less common, this structure is still available even if you’re forming a single member LLC.

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.

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 (a manager that isn’t a member) 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.