LLC Agent vs Member: Everything You Need to Know
Different from a non-managing member, the managing member of an LLC acts as the company's agent. 3 min read
What's an LLC Agent vs Member?
Different from a non-managing member, the managing member of an LLC acts as the company's agent. They have the power to sell or buy company property during the course of the business. They can also fire or hire employees, bind the company through contracts, and perform company operations directly. Employees, officers, managers, and members of LLCs can act as the registered agent for the company as long as they live or work in the same state where the LLC is formed.
The obligations and rights of LLC managing members need to be recorded in the operating agreement of the LLC. Managing members of LLCs have a variety of duties and rights that non-managing members do not have. These include:
- making decisions related to the daily operations of the company (such as firing, hiring, and promoting employees)
- being able to legally enter into contracts (helpful when they're contracting the purchase or selling of land on the LLC's behalf)
An LLC that has only a few owners, such as how many businesses are, will find that a member-managed LLC is the best structure. Two choices need to be made with a member-managed LLC, which is whether the owners will hire a third party to manage their company or the LLC will be run by the managing members.
All members will have an active role when it comes to managing the daily activity of the company. They are also authorized to be the company's agents. This means they're authorized to bind the company through a contract.
The default management structure for LLCs in many states is member management. For companies forming an LLC that want a member-managed LLC, they must put this in the operating agreement or formation documents.
Members won't play an active role in member-managed LLCs. They also won't be legal agents who can contractually bind a company. Management will be assigned to a group of members or a third party non-member. Third party managers can be a separate entity unless there are restrictions the state places on who can be in charge of the LLC.
What are Non-Managing Members?
Members who aren't managing don't have additional authority besides what's stated in the operating agreement. They also aren't agents of the company.
Managing Member Liability
Non-managing members in the LLC are protected by the limited liability shield. However, members are not protected from their own torts inside or outside the business. Managing members are personally involved in company operations, which means they're at a higher liability than a non-managing member.
Managing members may be sued by the LLC if their behavior brings injury to the company. This prejudices the interests of members who are non-managing.
There is an extra tax of 15.3 percent for self-employment tax. This is the portion of Medicare and Social Security taxes that the person's employer would have been in charge of. The Internal Revenue Services make rules about who needs to pay self-employment tax, but it can be complicated. Any LLC earnings from managing members will be classified as income and subject to self-employment tax.
Any distributions that non-managing members are paid is passive income. This excludes dividends from investment income or stock in corporations. It's smart to hire a business attorney or involve a CPA while coming up with the LLC operating agreement. They can help the organizers find the best way to minimize taxes that the members pay. Members who aren't managers won't be subject to self employment tax.
An LLC's managing member's income is classified as earned income versus passive income. This gives them the chance to get fringe benefits tax consideration for payments that are made on their behalf by the company. Benefits for health insurance don't have income tax for the managing member. However, benefits for non-managing members do not have this protection.
What is a Registered Agent?
A registered agent can be known as a resident agent. Each LLC in the United States needs to pick a registered agent to take any legal documents that the company gets served.
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