Key Takeaways

  • A Texas LLC Operating Agreement (Manager-Managed) clearly assigns decision-making authority to designated managers, who may be members or outside professionals.
  • This structure is ideal when some members prefer passive investment roles, or when professional expertise is required for daily operations.
  • The operating agreement should specify the managers’ powers, duties, voting rights, and removal procedures to prevent disputes.
  • Texas law allows flexibility—managers can be individuals or entities, but their role must be documented in the Certificate of Formation and the operating agreement.
  • Manager-managed LLCs can provide privacy for passive members, streamline decision-making in large LLCs, and allow for hiring professional management.

Manager Managed LLC

A manager managed LLC is a kind of limited liability company (LLC) in which one manager or a team of managers has control over the company’s daily activities, as opposed to the members of the LLC. This allows the appointed manager or team of managers to render decisions without a majority decision from all the shareholders, who relinquish authority to the managers. When such a system is adopted, the LLC owners vote on company issues, instead of pursuing active involvement in the operations of the company.

Managers in manager-managed LLCs need not be members of the company, unless restrictions in your state prohibit outside entities from performing such a role. However, an LLC needs one or more individuals to manage the company, playing a role similar to the board of directors in a corporation.

A manager-managed LLC can have any number of managers, but an odd number is generally preferred to avoid voting ties. Having a single manager can raise problems, as well, The LLC’s initial members will have to choose the number of managers at the outset.

If your LLC is manager-managed, it will most likely be legally required of you to state this choice in the organizational documents of your LLC.

Texas LLC Operating Agreement Requirements for Manager-Managed Structure

When forming a manager-managed LLC in Texas, the choice of management structure must be stated both in the Certificate of Formation and in the Texas LLC operating agreement. This ensures clarity for members, managers, and third parties interacting with the company. The operating agreement should:

  • Identify whether the LLC will be member-managed or manager-managed.
  • Name the initial manager(s) and state whether they must also be members.
  • Detail the scope of the managers’ authority, including decisions they can make without member approval.
  • Define limitations on manager powers, such as restrictions on taking on debt or selling significant assets without member consent.
  • Explain procedures for appointing, removing, or replacing managers.

In Texas, the operating agreement is an internal governing document and is not filed with the state, but it is legally binding among members. Managers, whether members or outside professionals, are bound by fiduciary duties of loyalty and care under Texas law.

Pros and Cons of Manager Management

Depending on your needs, manager management for LLCs has its advantages and disadvantages. The main ones fall into the following categories:

  • Flexibility
    • Manager-managed LLCs can quickly respond to changing economic conditions without heavy administrative burdens.
    • For this reason, a manager-managed LLC can be a good choice for a family business.
  • Passive Members
    • Some LLC members may be passive members, meaning they don’t take part in the daily decision making and thus have fewer liabilities. If such is the case, having an active member (or members) as the manager (or managers) makes more sense.
    • If some members are not skilled at management, manager management may be preferred.
  • LLC Size
    • If an LLC is very large, it makes more sense to have one or several managers run the operation, as gathering all members and having them render a decision would be inefficient.
    • Large LLCs benefit from having one or a few professional managers because for such organizations management alone can be full-time work.
  • Anonymity
    • Generally, member-managed LLCs must list their members publicly. Manager-managed LLCs do not have to meet this requirement.

It’s also worth remembering that if a single manager runs your LLC, that manager has fiduciary responsibility and the right to make decisions on behalf of the LLC. If you don’t want others deciding the course of the LLC or to have the decision-making power concentrated in one or a few individuals, then manager management is probably not for you.

When Manager-Managed LLCs Work Best in Texas

The Texas LLC operating agreement manager-managed model is especially effective in scenarios where:

  • Investor-heavy ownership – When most members are passive investors who prefer not to handle daily operations.
  • Large membership base – Avoids inefficiency of gathering all members for operational decisions.
  • Professional management needs – Allows the hiring of skilled non-member managers to run operations, while members focus on oversight.
  • Privacy concerns – Passive members’ identities can remain private from certain public filings, as only managers may need to be listed.

However, this model may not be ideal for small LLCs where all members want equal say in operations, or for owners who want direct control over business decisions.

The Employee Status of LLC Managers

If your manager-managed LLC brings in a professional manager, then that person is considered an employee. If they are not an outside entity but rather an LLC member performing management duties, then they are not considered an employee although they can receive payment as one. Such payment should be considered separate from the member’s status and be stated in the LLC operating or employment agreement.

Compensation and Authority Provisions

In a Texas LLC operating agreement, manager compensation should be addressed clearly. Managers may be:

  • Paid a salary as employees, if they are non-members hired to manage operations.
  • Compensated through profit distributions if they are also members.
  • Granted bonuses or performance incentives tied to company performance.

The agreement should also specify:

  • Whether managers can bind the LLC in contracts without additional approval.
  • Spending or contractual limits requiring member consent.
  • Processes for resolving disputes between managers and members over operational decisions.

Properly defining these provisions helps avoid misunderstandings and ensures smooth business operations.

When to Select Your LLC’s Management

In most states, the manager-management designations must be made clear in the operating agreement, which should state, amongst other things:

  • Who the managers are and how they will make decisions.
  • What responsibilities and roles the managers will have.
  • How managers may be replaced.
  • What the manager’s voting rights are.
  • How LLC members can choose new managers.
  • What the buy-out provisions are.

If you don’t have such an operating agreement, there is the risk of a management crisis if an unexpected conflict arises because these issues were not agreed upon beforehand.

Additionally, if you do not draw up your own LLC operating agreement, then the rules your state has set out for LLCs will apply, which may not be ideal for your business.

Fiduciary Duties and Liability in Texas

Under Texas law, LLC managers—whether members or outside professionals—owe fiduciary duties to the LLC and its members. These include:

  • Duty of loyalty – Acting in good faith, avoiding self-dealing, and prioritizing the LLC’s best interests.
  • Duty of care – Making informed, prudent decisions as a reasonably careful person would in similar circumstances.

While the operating agreement can adjust certain management responsibilities, it cannot fully eliminate core fiduciary duties. Additionally, managers can be held personally liable if they breach these duties or engage in fraudulent or unlawful conduct.

Including indemnification clauses in the operating agreement can help protect managers from personal liability for actions taken in good faith within the scope of their authority.

Frequently Asked Questions

  1. Is a manager-managed LLC common in Texas?
    Yes. Many Texas LLCs choose this structure when some members want passive roles or when professional managers are needed.
  2. Can a manager in a Texas LLC be a non-member?
    Yes. Texas law allows managers to be members or non-members, including outside professionals or business entities.
  3. Does a Texas LLC operating agreement need to name the manager?
    Yes. While the state filing must indicate the management structure, the operating agreement should name the manager(s) and outline their powers.
  4. Can members remove a manager in Texas?
    Yes, but the procedure must be detailed in the operating agreement. Without it, removal may require unanimous member consent under default law.
  5. Are managers in Texas LLCs liable for company debts?
    Generally no, unless they personally guarantee obligations or engage in misconduct or fraud.

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