Key Takeaways

  • Managing an LLC effectively involves choosing between a member-managed or manager-managed structure and documenting this in your Articles of Organization.
  • A clear operating agreement should outline management roles, voting rights, profit allocations, and procedures for adding or removing managers.
  • Regular compliance, strong recordkeeping, and proper internal controls help protect limited liability status.
  • Manager-managed LLCs can appoint a board of managers or corporate-style officers for smoother decision-making.
  • Each state has specific rules for LLC management and filings—failure to comply may result in penalties or dissolution.
  • Consulting an attorney can help tailor your LLC’s management and compliance structure to your business’s needs.

How to Manage an LLC

To manage an LLC, you must create the LLC, establish a payment allocation system, create an operating agreement and protect your assets using insurance if necessary. LLCs offer the limited personal protections of corporations but without the burdensome requirements of a corporate structure. Further, LLCs are easy to create and are less costly. It is a great option for people who do not intend to raise a large amount of cash.

Allocation System

LLCs permit special allocation of profits, which is the proportionate share of member profits based on the amount of ownership, otherwise known as guaranteed payments. This also allows members to write themselves checks whenever they need money, but only if the LLC has cash readily available. Further, members can record profits on their tax returns while writing off any losses in the process.

Further, a managing member’s share of any bottom-line profit is not classified as earned income due to the managing member being considered an inactive owner, giving them access to tax-fringe benefits. A guaranteed payment system is also earned income to each member, allowing them to enjoy tax-favored fringe benefits.  

Creating an LLC

The articles of organization creates your LLC and must be registered with the LLC corporate division of your respective state. The corporations division is usually associated with the secretary of state office in your state. Fees vary, but they usually amount to around $100.

States usually give you a one-page blank form, where you supply essential details about your LLC. Details should include:

  • Name
  • Address
  • Contact Info
  • Registered Agent

Other states may require you to list all names and addresses of each LLC member.

Choosing a Business Name and Registered Agent

Before filing your LLC, you’ll need to select a unique business name that complies with your state’s naming requirements. Most states require the name to include “LLC,” “L.L.C.,” or another variation to indicate limited liability company status. Be sure to check for name availability through your state’s business database.

You’ll also need to appoint a registered agent—an individual or company authorized to receive legal documents on behalf of your LLC. The registered agent must have a physical address in the state where the LLC is registered and be available during regular business hours.

Foreign Qualification for Out-of-State Business

If you plan to conduct business in a state other than where your LLC was formed, you must register as a “foreign LLC” in that state. This process, called foreign qualification, involves filing paperwork and paying fees in the additional state. You’ll also need a registered agent located in each state where you operate. This is crucial for legal compliance and avoiding penalties.

Operating Agreement

An operating agreement outlines the basic management structure of your business. It is not a document you need to register with authorities, but you should draft one for the sake of organization, and to ensure that all members know their roles and duties. Further, you should detail the compensation plan in the operating agreement so all parties are aware of how they will be compensated, including their share in the business.

Management Clauses to Include in Your Operating Agreement

A strong operating agreement is the cornerstone of managing an LLC effectively. It should clearly define each member’s voting rights, profit-sharing ratios, and authority limits. Beyond operational rules, include clauses addressing:

  • Succession planning if a member withdraws or passes away
  • Procedures for adding new members or transferring ownership
  • Dispute resolution and arbitration processes
  • Allocation of profits and guaranteed payments
  • Appointment and removal of managers

Even in single-member LLCs, an operating agreement protects against challenges to limited liability and establishes your business as a legitimate entity.

Member vs. Manager Management Structures

LLCs can be structured as either member-managed or manager-managed:

  • Member-managed LLC: All owners (members) are actively involved in running the business.
  • Manager-managed LLC: Designated managers (who may or may not be members) handle daily operations, while other members take a passive role.

Your operating agreement should clearly define which structure your LLC follows and detail the roles and responsibilities of each person involved. Choosing the right structure impacts how decisions are made and how the business is perceived by investors and partners.

Clarifying LLC Management Roles and Responsibilities

When managing an LLC, clarity around authority and decision-making is essential. Your Articles of Organization must specify whether the company will be member-managed or manager-managed, as this determines who has the power to act on behalf of the LLC. If the Articles don’t specify, most states default to a member-managed model—meaning each member can bind the company in contracts and operations.

For manager-managed LLCs, the managers—who may or may not be members—oversee day-to-day operations. Members take a more passive, ownership-focused role. Some LLCs adopt a board of managers, similar to a corporate board of directors, where multiple managers make collective decisions. This structure can help streamline business direction and avoid management deadlock.

Your operating agreement should define:

  • The method for electing and removing managers
  • The scope and limits of managerial powers
  • Compensation or fees paid to managers
  • Conflict-of-interest rules for transactions between managers and the company
  • Deadlock provisions, especially if there are multiple managers with equal voting power

Using distinct terms like “Manager” and “Member” in contracts and business dealings is recommended to prevent confusion when representing the company to third parties.

EIN

EINs are used by the IRS to label and tax your business. Getting a federal employer identification number is crucial for a number of reasons, including:

  • Hiring Employees
  • If Your LLC has more than one member

You may get an EIN for free by visiting the IRS website. An EIN is also crucial when you open a business bank account.

Tax Classification Options

By default, the IRS classifies single-member LLCs as disregarded entities (taxed like sole proprietorships) and multi-member LLCs as partnerships. However, LLCs can elect to be taxed as an S Corporation or C Corporation by filing Form 8832 or Form 2553. This flexibility can provide tax advantages depending on the nature and size of your business.

Consulting a tax professional can help you determine the most beneficial tax structure for your LLC, especially if your goal is to reduce self-employment taxes or reinvest profits back into the business.

Dividing Business and Personal Assets

Even though certain states frown upon this practice, some individuals create sole-member LLCs to obtain a new EIN and get a new line of credit. Regardless, you should avoid mixing business and personal lines of credit. With that, if a member secures collateral or funding based on his or her personal credit score, consult an account to document the transaction accordingly.

Regardless of how the credit is obtained, you should always maintain a firm wall between personal and business matters. Failure to do so may open up your LLC to legal risk despite LLC personal liability protections. Some courts and creditors have been able to get around LLC liability laws if members comingle personal and business activities.

Insurance

In the event that LLC laws do not protect your assets, you may also get a sound insurance policy that protects your assets. For example, if you’re a massage therapist who injures a client, your insurance policy will protect your assets in case a lawsuit occurs. Moreover, insurance is a great asset should a court ignore your liability protections. Insurance can also protect business and corporate assets from judgments and lawsuits.

With that, it is worth noting that commercial insurance does not safeguard corporate or personal assets stemming from unpaid business debts, regardless of whether they’re guaranteed personally.

Paperwork

Annual filing and other regular paperwork is a necessary part of maintaining an LLC. For example, an LLC based in Michigan must renew annually, and the LLC could risk being dissolved if you fail to file on time. For this reason, you must be sure that your articles of organization remains in good standing, and be sure to include any changes to the LLC by mailing in updates to the IRS and your state. When signing any documents for the company, use the full company with the applicable suffix (LLC, L.L.C, etc.) and include your name as the member of the LLC with your official title.

State-Specific Requirements

Each state has its own rules regarding ongoing LLC compliance. Some states, like New York and Arizona, require LLCs to publish a notice of formation in local newspapers for a designated period. Others may mandate franchise taxes or biennial reports instead of annual ones.

Failing to meet state-specific requirements can result in late fees, penalties, or administrative dissolution of your LLC. Always check with your Secretary of State’s office or consult a legal professional to stay on top of your obligations.

Maintaining Good Standing

Staying in good standing with your state involves more than filing annual reports. It also includes:

  • Paying required fees or franchise taxes
  • Maintaining an active registered agent
  • Updating your business address or member information as needed
  • Keeping accurate business records and minutes (if applicable)

A lapse in compliance can limit your ability to enter into contracts, access financing, or defend your LLC in court. Make use of compliance calendars or legal services to help manage these obligations effectively.

Practical Tips for Managing an LLC Day-to-Day

Effective LLC management goes beyond compliance filings—it involves structured daily operations.To keep your LLC running smoothly:

  • Hold regular meetings (even if not legally required) and document major decisions.
  • Keep financial transparency using accounting software and separate business accounts.
  • Assign clear duties to members or managers for financial oversight, operations, and compliance.
  • Establish internal controls to prevent misuse of funds or conflicts of interest.
  • Maintain accurate and accessible business records, including tax documents, meeting notes, and updated membership rosters.

Many LLCs also benefit from appointing officers, such as a President or Treasurer, to handle specific functions—especially as the business grows. This corporate-style delegation can help maintain accountability and operational efficiency.

Recordkeeping and Internal Controls

Implementing strong internal controls and recordkeeping practices helps ensure transparency and financial integrity. Consider:

  • Keeping separate bank accounts and credit cards for business use
  • Documenting all major business decisions in meeting notes
  • Using accounting software to track expenses and income
  • Storing documents like the operating agreement, EIN confirmation, formation documents, and licenses in a secure location

Good recordkeeping is especially important during audits or legal disputes and reinforces your LLC’s limited liability protections.

Common Pitfalls When Managing an LLC

Even with a well-drafted operating agreement, poor management habits can undermine your LLC’s protections. Common mistakes include:

  • Mixing personal and business funds, which can lead to “piercing the corporate veil” in lawsuits.
  • Ignoring tax obligations, such as estimated payments or self-employment taxes.
  • Failing to update records when adding or removing members or managers.
  • Lack of communication between members, leading to internal disputes.

Addressing these pitfalls early ensures smoother operations and preserves your limited liability protections. Consider engaging an accountant or business attorney for periodic reviews—especially as your LLC grows or expands into new states.

Frequently Asked Questions

  1. What’s the difference between member-managed and manager-managed LLCs?
    Member-managed LLCs give all owners equal authority in running the business, while manager-managed LLCs delegate daily operations to one or more designated managers.
  2. Can a single-member LLC have a manager?
    Yes. A single-member LLC may appoint a manager to handle day-to-day operations, but the owner retains ultimate control and decision-making authority.
  3. How often should an LLC update its operating agreement?
    Review it annually or whenever there’s a significant change in ownership, management, or business operations.
  4. Do all states require LLCs to have an operating agreement?
    Not all states require one, but having an operating agreement is highly recommended to clarify rights, roles, and responsibilities.
  5. Can I manage my LLC myself?
    Yes, you can be both the owner and manager of your LLC. Just ensure compliance with state rules, proper recordkeeping, and clear separation between personal and business finances.

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