LLC Managers: Everything You Need to Know
The way an LLC functions in regards to its management structure is similar to a corporation, but only in some ways. 4 min read
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?
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.
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.
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