Member-Managed LLC vs. Manager-Managed LLC
The limited liability company (LLC) is a relatively new type of business legal entity in the U.S. The LLC functions for management purposes in a similar way as a corporation, but in some ways the management is different. This article explains the two ways an LLC can be managed - by one or more members or by a manager.
Management of an LLC
An LLC is a limited liability company whose owners are called "members." An LLC may be composed of one or more members: a single-member LLC or a multiple-member LLC. (These two types of LLC's are taxed differently, which is why they are separated here.)
In the same way as any other type of business, an LLC must have one or more individuals who manage the company, acting as the board of directors does in a corporation. An LLC may be managed by the members (one member or all the members together), or the LLC may decide to hire a professional manager.
A single-member LLC is the manager of the business unless they hire an outside manager, who becomes an employee.
Member-Managed vs. Manager-Managed
Member-managed LLCs work like this: All members participate in the decision-making process of the LLC. Each member is an agent of the LLC and each member has a vote in business decisions. Decisions can be made by consensus. The members must agree on how to break a tie. Each member has the authority to make decisions on behalf of the company in their area of expertise, but contracts and loan agreements must be approved by a majority of the members.
Manager-managed LLCs give the authority of the members to the manager or managers, who become agents of the company. A manager may be a member but does not have to be. A manager may be another LLC or a corporation unless your state sets restrictions on the types of entities that may be managers of an LLC.
Most LLCs are member-managed by default in most states. That is, no manager is selected and member management is assumed. In most states, manager management must be designated in the Operating Agreement.
If your LLC selects a manager, the manager has the authority to make decisions for the LLC and this person has fiduciary responsibilities. If you don't want someone else deciding, then the members can and should keep that right.
LLCs often choose a manager in two cases:
Passive Members: In some LLCs, members can be passive (similar to limited liability partners). These individuals may be investors and designated as members, but they do not participate in the day-to-day decision making of the company. Because they aren't participating in decision-making, passive members have less liability.
In this case, it makes sense to have a manager or several managers (a manager can also be a member) to run the business. If there are both passive and active members, the manager should be an active partner.
Size of the LLC: In very large LLCs, it also makes sense to select one or more managers to run the company, since it would be difficult to try to get all the members together to make decisions. The members can then focus on their expertise and the work they want to do.
A professional manager is also a good choice for a large LLC because the management is much more complex, and the day-to-day decisions can be a full-time job.
Compensation for LLC Managers
Non-Member Manager. If your LLC hires a professional manager, that person is an employee. This person should be paid a reasonable salary and payroll taxes must be withheld from their pay. They should also receive an employment agreement spelling out their duties, pay, and benefits.
Member-Manager. The LLC can designate one member to be the manager. In this case, the LLC member who serves as a manager wears two hats and gets two types of payments:
- The member shares in the earnings of the LLC, based on their ownership percentage, and
- The member also may receive pay as manager. In this case, the member is paid as an employee, with a reasonable salary and payroll tax withholding.
This distinction in duties should be spelled out in the LLC's operating agreement or an employment agreement.
Other Management Options
The manager of the LLC may be a management company. In this case, the company would be paid as an independent contractor, with a management agreement (similar to an independent contractor agreement).
An LLC also has the option to create a board of directors to oversee the business and to appoint officers to direct the day-to-day operation of the company.
When to Select Your LLC's Management
The time to determine who will manage your LLC is before you begin operations. The operating agreement should specify who will manage and how decisions will be made. Don't leave this important question for later or you may find yourself in legal difficulties.
Some states may ask for the names and street addresses of managers in the Articles of Organization (the document you use to register your LLC with a state).
Get help from your attorney to include a management agreement in your operating agreement or in a separate contract.