LLC Management: Everything You Need to Know
LLC management is similar to that of a corporation, but there are notable differences. 3 min read
LLC management is similar to that of a corporation, but there are notable differences. When you form an LLC, you have to make a decision on how to manage the company. Owners of an LLC are called members. There could be only one member, which is a single-member LLC, or there can be a multiple-member LLC. Like other business types, an LLC needs at least one person who manages day-to-day operations, like a corporation's board of directors does.
You should also set up an Operating Agreement that details exactly how the management is to be handled. The Operating Agreement should spell out how members will manage the LLC, how to elect managers, and how managers vote on operational and other aspects of the business.
You can decide to have all members manage, or hire a professional manager. With small LLCs, member-managed is usually preferred. When you decide to have a manager-managed LLC, you have to then decide whether it will be a group of managing members, or whether you will choose a completely different third-party to run the LLC. Manager-managed is often preferred when some or all the members have no interest in participating in the LLC's management. The other members of a manager-managed LLC are considered passive investors.
Member-Managed LLCs Versus Manager-Managed LLCs
With member-managed LLCs, all members play an active part, and each one is authorized to be an agent of the company, binding them in contracts. For most states, member-managed is the default status. If you want to go with manager-managed, you need to formally declare it in the Operating Agreement or when you are filing your Articles of Organization. While each member is an agent of the LLC and votes in the decision-making process, contracts and loan agreements need to be agreed upon by a majority of the owners.
Management is far less rigid than a corporation, as there is no requirement to keep a board of directors or separate management level in an LLC. Before deciding on the management type, it's important to decide on what role everyone plans to play in the future.
For an LLC that wants to manufacture goods or provide services, you should consider setting up the business as a member-managed LLC. Businesses like retail stores, restaurants, and bakeries are ones that typically choose member-managed.
Not all businesses are best-suited for member-managed structure, making the manager-managed option a better route. Businesses with a large number of members typically benefit from the manager-managed model. Trying to reach a group consensus with a large number of members can be extremely difficult. By choosing a manager-managed structure, it is more streamlined and operations run more smoothly, even if members cannot get together in one place to vote.
Manager-managed LLCs can protect themselves from their members who lack the capacity to effectively run the business. This protects the LLC's interests as well as individual investors' money. This can be an ideal structure for family businesses as well when you have children you want to bring in, but not give control to.
Other benefits of manager-managed LLCs can include:
- This helps grow the LLC's assets and profits without the children having to be involved in the management.
- In some instances, a manager-managed LLC can help with outside perception.
- Some investors may be worried about all members making important decisions.
- This gives owners the ability to reassure its investors that all money is in good hands.
What Is the LLC Managing Member?
Acting managing members are considered agents of the business, which means they have authority to bind the LLC to contracts. This is why you need to clearly document the rights and obligations of LLC managing members in the Operating Agreement.
By default, multiple-member LLCs are treated as a partnership for tax purposes, which means the LLC doesn't pay any income taxes at the business level. Members pay income tax on their share of the profits, known as distributive shares. Laws surrounding self-employment taxes are complex, but managing members should expect to pay self-employment tax as well. Non-managing members are not subject to the self-employment tax.
It's recommended to consult with a qualified tax consultant when setting up the LLC's Operating Agreement as they can advise tax benefits and drawbacks for both managing and non-managing members.
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