LLC Manager Vs Member: Everything You Need to Know
Understanding the difference between LLC manager vs member is critical when setting up an LLC4 min read
Understanding the difference between LLC manager vs member is critical when setting up an LLC. An LLC is a relatively newer business organization option, and it has some similarities in management style to corporations, but it's still inherently different. There are some important things to understand about an LLC before you understand what role each person plays in the company:
- Anyone who is an LLC member is an owner. Owners can have any percentage of the company.
- All states recognize single-member LLCs, as well as multiple member LLCs.
- There is no cap on how many members an LLC can have.
Management of an LLC
Owners of an LLC are called members. You can have one member, which is a single-member LLC, or multiple members, which is a multiple-member LLC. LLCs must have at least one person who manages the company, similar to what a board of directors does in a corporation. You can opt to have it be managed by its members, or you can hire an outside person or team to manage it instead.
Essentially, with member-managed LLCs, all members participate in the day-to-day operations and management. With a manager-managed LLC, only designated member(s) or non-member(s) have the authority to run the business. Other members are considered passive investors and are not involved with day-to-day operations.
When defining what management means in this context, details are often covered in the Operating Agreement. In general, it usually is the ability to enter into contracts on the LLC's behalf and participate in business decisions that take place.
Other tasks managers can do include:
- Open and close a bank account
- Make legal and financial decisions
It doesn't matter who is managing, but that person has a fiduciary, or legal, duty to always act in the LLC's best interests.
Member-Managed Versus Manager-Managed LLCs
Members have equal say with a member-managed LLC. Each person has a vote and a say in how decisions are made. With a manager-managed LLC, the important decisions are left to designated members or non-members who are called managers. The remainder of members are considered passive investors and have no say in any business decisions.
The main difference between manager and member managed is the ability to have passive investors with manager-managed LLCs. Because, with a member-managed business, all owners have a say.
Members must have a more hands-on role in a member-managed LLC. Member-managed is the more popular option when people are setting up their LLC. This is because most LLCs tend to be small businesses who only have limited resources and therefore don't have a need, or the funds, for an outside management level.
To understand the differences, if you want to run your own LLC and make products, take orders, hire any employees, etc., you will need to choose a member-managed LLC. Another example would be a restaurant or bakery where you want to develop recipes, bake your own treats, hire new employees, and open and close the shop.
There are some scenarios where manager-managed may be preferable. The main example is when some members want to be passive investors. Other scenarios may be when your LLC is too big with too many members and it would be easier to delegate to a smaller team, or some members do not have the necessary skills for management.
Manager-managed LLCs can also be more streamlined, as owners can ensure the competency of the management team in place. To choose member-management, you don't need to formally declare this option, but it's wise to disclose it on the Articles of Organization you file.
LLC Structure Documentation
LLC Operating Agreements are even more important if you are opting for a manager-managed LLC. This can discuss member voting rights, how capital is raised, what buyout provisions exist, etc. You can have a serious crisis on your hands when you don't have an operating agreement, as even the most basic of issues may not be agreed upon from the start.
LLCs who opt for manager-managed may have a legal requirement to spell this out somewhere in the organizational documents. It's typically noted in the Articles of Organization you filed.
You should include manager roles and what authority they have for all decisions. Do they have sole responsibility for decisions like hiring or purchasing company equipment? Without your own Operating Agreement, the state's LLC rules will apply, and they are not necessarily always favorable.
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