Member Managed vs Manager Managed LLC

LLCs are a popular business entity for a number of reasons. They’re relatively easy to get up and running and normally not overly difficult to maintain in terms of licensing, filing annual reports, and performing other tasks necessary to remain in compliance. They provide flexibility in how the business is taxed and shield members from personal liability.

Also, LLC members are able to decide how the company will be managed. An LLC that has more than one member, known as a multi-member LLC, has the option of being member-managed or manager-managed. The member of a single-member LLC is automatically considered to be the manager of the business.

If your business is member-managed, every member shares management responsibilities equally. If some members perform management duties but others do not, the company is considered to be manager-managed. An LLC also is considered manager-managed when it’s run by one or more professional, non-member managers.

If you choose to have your business manager-managed, you’ll need to specify that in your Articles of Organization, which is a public document containing information relevant to your business that must be filed with the state in which it will operate. If you don’t, most states will consider your business to be member-managed by default.

It’s important to understand the distinctions between member-managed and manager-managed LLCs, as it affects the day-to-day operations and how the business is run. Let’s look at what the managers do, the differences between management types, and some pros and cons of member-managed and manager-managed LLCs.

What Does an LLC Manager Do?

The manager or managers of an LLC are responsible for handling day-to-day operations of the company. In many companies, this includes making important business decisions as well as overseeing tasks such as paying bills, issuing invoices, and hiring employees. Some other tasks of managers include

• Manage bank accounts
• Borrow money through business loans
• Buy and sell business equipment, vehicles, buildings, and other business assets
• Enter into legally binding agreements

An LLC’s operating agreement should spell out the specific responsibilities of individual members, which can vary depending on what members decide is best for the business. Ideally, members will have complementary skills and backgrounds that will allow for smooth and effective operations.

In the event that members are not equipped to handle a difficult or complicated matter, such as a real estate transaction or tax issue, they should consult professionals to guide them through.

Member-Managed LLCs

Most multi-member LLCs choose to be member-managed and have all members involved in managing the business. That means everyone participates in the decision-making process and the work of the company. Significant decisions, such as entering contracts and securing loans, must have approval from a majority of members.

All owners may have an equal say in decision-making, or it can be proportional to a member’s share of ownership. For instance, someone who owns 30 percent of the business may have twice as much say as a member who owns 15 percent.

While states don’t require one, every member-managed LLC should have an operating agreement that details each member’s responsibilities in running the company, each individual’s decision-making authority, and how profits should be distributed among members.

Situations when the member-managed structure may be preferable:

• A business in which all members want to be actively involved in the company’s work, specifically producing, selling, or supporting the production and sale of the company’s products or services.
• A company that has limited resources and is unable to support a management level between the business and its owners.

Possible downsides of being member-managed:

• Management of the business requires a lot of time and energy, which may take away from owners’ ability to work on strategic decisions.
• Having all members involved in all decision making in a large LLC can be unwieldy, sometimes enough to interrupt the flow of day-to-day business.
• Investors might not be as interested in funding a member-managed business as they would in one that is manager-managed.

Manager-Managed LLCs

In a manager-managed LLC, members relinquish the authority to manage the operations of the business to whoever they designate as the manager or managers. The members in a manager-managed business typically make high-level decisions (such as entering contracts, signing loans, etc.), but they do not get involved in day-to-day tasks or issues.

One or more members of an LLC can serve as managers, but a manager also can be a non-member, if permitted by the state.

Note that although an LLC’s members may be chosen to serve as managers, the manager role is not an ownership position. A manager, including any member who is designated as manager, gets compensated as an employee of the company. The employment income that a member earns as a manager is separate from that member’s status as an owner.

Situations when the manager-managed structure may be ideal:

• An LLC with more than one member has owners who want to invest financially in the business but do not want to be involved in the details of running the company.
• Members don’t have extensive experience running a business, and by hiring someone with the operations expertise they lack, they can enjoy the perks of having their own company and feel confident that it’s in capable hands.
• A business with many members may find it difficult to get multiple owners to agree on everyday business decisions; having a manager to handle operations removes the need for consensus of all members on every small detail involved in running the business.
• A family business in which the parents want to involve their children in the company but don’t want to give up strategic decision-making.

Possible downsides of being manager-managed:

• It might be challenging to determine how much authority to give the manager.
• Some or all owners lose control over management decisions.
• A manager who’s not an owner may not have as strong an understanding of the company’s vision and values as a member who serves as the manager.
• Paying a manager may create financial hardship for a new business.

Starting an LLC

Most of the steps required to form an LLC are the same regardless of whether the business will be member-managed or manager-managed. Below is a short list of the tasks to consider:

1. Regardless of the management structure chosen, forming an LLC requires filing business registration paperwork (Articles of Organization or Certificate of Organization) and paying associated fees with the state in which the company will operate. If your business will be manager-managed, you must inform the state within this paperwork.
2. LLC owners should meet with an accountant or tax advisor to determine whether the business should be taxed as a Partnership, C Corporation or S Corporation.
3. The business must also appoint a registered agent within the state where it will operate. A registered agent is a person or business authorized to receive legal correspondence on behalf of the company.
4. Although not required by states, an operating agreement should always be created to ensure all members understand their roles, rights, and responsibilities and agree on the way the company will be managed and how decisions will be made.
5. As with any business entity type, the LLC must obtain any licenses, permits, professional certifications, etc. that it needs to conduct business legally.
6. There will be some ongoing business compliance responsibilities after the business is formed. It’s critical for members to understand those requirements and keep careful track of them, so they don’t miss important reporting and filing deadlines. Possible obligations might include renewing licenses and permits, filing annual reports, holding member meetings, paying taxes, and other formalities.

How Can CorpNet Help?

If deciding on a management structure, figuring out the best way your company should be taxed, filing registration paperwork, obtaining licenses, and conducting all the other business necessary to get an LLC registered seems daunting, don’t worry, there is help available.

Once you’ve worked with qualified experts to determine your tax situation and how your LLC will be managed, CorpNet is here to help you prepare and file all the necessary paperwork to register your business. With expertise and experience in filing LLC formation documents in all 50 states, our team of filing specialists will ensure that your forms and applications are completed accurately, quickly, and cost-effectively.