LLC Member Manager: Everything You Need to Know
An LLC member manager operation is the most common approach to managing a limited liability company, which allows all members shared responsibility for day-to-day operations. 3 min read
An LLC member manager operation is the most common approach to managing a limited liability company, which allows all members shared responsibility for day-to-day operations. This management structure is preferable because an LLC is often a small business that doesn't need a separate level of management.
Overview of Member-Managed LLCs
A limited liability company may be managed by all members, or a professional manager may be hired.
Whereas a corporation works with a board of directors and officers, an LLC is a more streamlined structure that does not operate within the same confines as a corporation.
An LLC is often chosen by business owners who prefer direct involvement with the operation and management of their business. Within an LLC structure, when all members are involved in running the business, such as selling products, hiring employees, providing services, and taking orders, then owners would choose a member-managed structure.
A member-managed business structure is the default set-up for limited liabilities in many states. In these states, if your formation documents or the operating agreement does not designate a management structure, it is considered a member-managed business.
Operating Agreement and Member-Managed Duties
When creating the operating agreement for an LLC, the obligations, duties, and rights of the managing members should be clearly documented in the agreement. The agreement should state which areas managing members have sole authority over and which areas require a group approval or other form of approval.
Managing members may have several responsibilities that non-managing members do not participate in, such as:
- The day-to-day management and decision-making responsibilities related to the company.
- Examples of responsibilities include the LLCs daily operating procedures and human resource decisions regarding current and potential employees.
- Managing members have the authority to enter into binding contractual agreements. This can range from contracting with a supplier to purchasing real estate for the LLC.
Personal Liability and Member-Managed LLCs
A limited liability company provides managing members and non-managing members limited liability protection. However, liability protection does not apply if there is any wrongdoing by any member of the LLC.
Since managing members have more involvement in the daily operations of the LLC versus non-managing members, there is a higher risk of personal liability. This may be the result of intentional wrongdoing or negligence in their role as manager.
Tax Implications for LLC Managing Members
A limited liability company is treated much like a partnership at tax time. What this means is an LLC does not pay taxes on itself. Profits earned by the LLC are divided and distributed among its members.
The share of the profit received by the members is known as the distributive share, which is calculated according to the terms specified in the operating agreement. In many cases, the distributive share is based on the percentage of each member's interest in the company.
The managing members of an LLC are subject to self-employment taxes on their distributive share. For non-managing members who do not engage in the operations of the LLC, they do not pay self-employment tax.
The rules in place by the Internal Revenue Service regarding self-employment tax are complicated. For this reason, it is to your advantage to consult a tax advisor who can explain, in detail, the full implications involving taxes for both managing members and non-managing members.
Information About a Single-Member LLC
For the most part, limited liability companies that are comprised of one member will choose/elect to be considered as a member-managed LLC. But, a single-member LLC can also choose/elect to be considered a manager-managed business.
In short, the member has the option to choose which management structure works better for their particular situation. He or she can be the manager or elect a manager, which includes themselves, to act as manager for the LLC.
There is an advantage to electing yourself as the manager of the LLC. In some states, owners may be required to make known to the public via their company's Articles of Organization the names of the LLC's members and manager.
If you list yourself as the manager, it does not automatically make it public knowledge that you are the owner of the LLC. Choosing to list yourself as a member makes it clear you are the owner of the limited liability company.
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