Key Takeaways

  • Manager-managed LLCs delegate authority to one or more designated individuals, often freeing members from daily operations.
  • These LLCs offer flexibility for passive investors and are suitable when not all members want to manage the business.
  • Managers, whether members or outside hires, may be subject to employment taxes and must be compensated appropriately.
  • Manager-managed LLCs can offer tax benefits, especially for passive members avoiding self-employment tax.
  • Securities laws may apply when non-managing members are treated as passive investors.
  • The operating agreement should clearly define management powers, voting thresholds, and tax responsibilities.

LLC managers can either be member-owners or non-owners of an LLC. The way an LLC functions in regards to its management structure is similar to a corporation, but only in some ways. 

Who Are LLC Managers?

It's important to understand how to manage an LLC prior to forming one. LLC members can either be just members or managing members.  

Regarding management within the LLC context generally means the manager has authority to enter into contracts on behalf of the company, has a say in business decisions, and is involved in day-to-day activities. In addition, the person, or people, managing the LLC have the authority to:    

  • Make financial and legal decisions on behalf of the company  
  • Open and/or close a bank account and other financial accounts       
  • Purchase and/or sell real estate, cars, investments, etc.      
  • Sell LLC assets       
  • Obtain financing or a loan     
  • Make human resources decisions like hiring and firing staff, using freelancers, etc.

The LLC manager(s) has a legal obligation to always act in the best interest of the company. 

LLC members are owners, they are not employees. However, if an LLC member handles management duties, he or she can receive financial compensation as an employee would. The income earned as employment is kept separate from the member's ownership stake, and the differentiation needs to be clearly spelled out in the LLC Operating Agreement or an employment agreement at a minimum. If an outside manager is hired, they are an employee and should be paid a reasonable wage and have payroll taxes withheld. Verify with your state, but many states allow another LLC or corporation to be managers of an LLC. 

Managers Versus Members

In theory, anyone having a membership interest has the right to participate in the management of an LLC. Or, the LLC can hire non-member managers to handle management duties and daily operations, or a member may hold a management position that is similar to an employee. 

Members who are active can manage the business and are granted authority to enter contracts on behalf of the company. As long as the member doesn't act inappropriately or behave in a manner that is beyond the scope of his or her authority, the member doesn't have exposure to personal liability if the LLC doesn't satisfy its obligations. 

An employee-manager can also enter a contract on behalf of the LLC. The Operating Agreement is where you outline the limitations for member-manager and non-member manager to make a binding contract on behalf of the LLC. You may place more restrictions on an employee versus a member. Members who voluntarily exercise their right to participate in management don't receive wages from the company. 

It's customary that his or her efforts are rewarded through LLC profits and the value of the membership interest. When you have a situation where the company designates a member to be a manager, that member has the right to receive reasonable compensation for their services on top of income distributions. 

A manager who is solely an employee of the LLC will receive a salary but not any profit distributions as a member. Managers who are not members with an ownership interest can be terminated by members at will or in any manner that is in compliance with local labor laws. Expelling a member is harder to do. Unless the Operating Agreement sets forth conditions allowing it, you cannot expel someone from the LLC unless there is a unanimous approval of all other members. If someone is expelled, they do not lose their financial interest. 

Employee-managers have different tax rules than regular members. Employee-managers must report the gross income they receive on their personal tax returns, and they are subject to withholding taxes each pay period. For LLCs that don't choose to be taxed as a corporation, all members pay income tax on their share of the LLC's earnings. Each member is required to pay tax on his or her individual returns, even if the LLC didn't distribute profits. 

Manager-Managed LLCs

An LLC which is manager-managed has appointed one or more managers, and these individuals are the only ones who can enter into contracts on behalf of the LLC. The manager can be an existing member, or the LLC can hire an outside manager who has no ownership interest in the company. Managers become the agents of the LLC, as members relinquish their authority to them. There are situations where some members prefer the manager-managed structure as they want to be passive investors, or lack the skill or experience to manage the business on their own. 

Securities Law and Manager-Managed LLCs

In some cases, ownership interests in a manager-managed LLC may be treated as securities. This is particularly likely when:

  • The LLC has multiple members who are not involved in daily operations.
  • Passive investors contribute capital with no control over management.

In such scenarios, federal and state securities laws may apply. LLCs must either register the sale of ownership interests or qualify for an exemption (such as the SEC’s "intrastate offering" or "private placement" exemptions).

Failing to comply with securities regulations can result in significant legal penalties, so it's essential to consult a legal advisor when seeking outside investment.

Legal Considerations for Manager-Managed LLCs

Creating a manager-managed LLC requires clear documentation in the operating agreement. Key provisions should include:

  • Procedures for appointing and removing managers
  • Voting requirements for management decisions (e.g., majority or unanimous consent)
  • A definition of manager authority and restrictions
  • Quorum requirements for decision-making meetings
  • Indemnification clauses to protect managers from personal liability incurred while acting on behalf of the LLC

The agreement should also clarify whether managers can bind the LLC to contracts and whether their powers are exclusive. Without this documentation, disputes may arise regarding decision-making authority or liability.

When to Choose a Manager-Managed LLC Structure

A manager-managed LLC structure is ideal when not all members want—or are qualified—to manage the day-to-day operations. This setup is commonly used when:

  • There are passive investors: Members provide capital but do not want management duties.
  • Some members lack business expertise: It allows experienced managers to lead operations.
  • An outside professional is needed: A non-member manager with specialized skills can be appointed.
  • Succession planning is important: In single-member LLCs, naming a manager ensures continuity if the owner becomes incapacitated or passes away.

By limiting management authority to designated individuals, the LLC can operate more efficiently and reduce internal conflicts among members.

Tax Implications of Manager-Managed LLCs

n a manager-managed LLC, the tax treatment depends largely on the LLC’s tax classification and the roles of its managers and members. LLCs are typically pass-through entities, meaning the business itself does not pay federal income taxes. Instead, profits and losses flow through to the individual members, who report them on their personal tax returns.

However, the distinction between active and passive members becomes important for tax purposes:

  • Active Managers (Member-Managers): If a manager is also a member actively involved in the business, their share of income is typically subject to self-employment tax (currently 15.3%).
  • Passive Members (Non-Managing): Members who do not materially participate in the business—such as in a manager-managed LLC where they are not involved in day-to-day operations—may be exempt from self-employment tax. They report their earnings on Schedule E of their tax return.

In cases where the LLC elects to be taxed as an S corporation, compensation for managers who are also members must be split between a reasonable salary (subject to payroll taxes) and profit distributions (not subject to self-employment tax). This structure can help reduce the overall tax burden if handled correctly.

Non-member managers, who are not owners, are treated strictly as employees and must have payroll taxes withheld from their wages.

Frequently Asked Questions

  1. What is a manager-managed LLC?
    A manager-managed LLC is a business structure where one or more managers handle the operations and decision-making, rather than all members participating in management.
  2. How are manager-managed LLCs taxed?
    They are typically taxed as pass-through entities. Active managers may pay self-employment tax, while passive members may avoid it. Electing S corp status can further affect taxation.
  3. Can a manager be someone outside the LLC?
    Yes, a non-member manager can be appointed. They are treated as employees and must be paid wages with appropriate payroll tax withholdings.
  4. Are securities laws relevant to LLCs?
    Yes. If the LLC has passive investors, membership interests might be considered securities, requiring registration or exemption compliance.
  5. When should I choose a manager-managed LLC?
    This structure is ideal if some members want to remain passive, if professional management is needed, or for estate/succession planning in single-member LLCs.

If you have questions regarding LLC managers, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.