Key Takeaways

  • A single member manager-managed LLC operating agreement separates ownership from management by designating a manager, which can be the member or another trusted individual.
  • This structure allows the owner to delegate day-to-day responsibilities while retaining control over major business decisions.
  • The operating agreement should clearly outline the manager’s authority, limitations, and procedures for successor management in case of incapacity or death.
  • Essential provisions include defining membership, capital contributions, voting rights, distributions, tax treatment, and transfer restrictions.
  • Choosing manager-management can simplify operations for remote businesses, family enterprises, or single owners seeking to limit personal involvement.
  • Drafting a thorough agreement provides legal protection, enhances clarity for lenders or investors, and ensures compliance with state LLC laws

A manager-managed LLC is a popular option when an LLC has many members. An LLC structure provides its members with much flexibility including designating how the company will be managed. An LLC has the option of being:

  • Member-managed
  • Manager-managed

Starting an LLC

When starting an LLC, there are a few steps you will need to take including:

  • Obtaining all necessary licenses or permits.
  • Choosing a business name.
  • Having a business plan that outlines day-to-day operations, finance, and marketing.

Importance of an Operating Agreement

Even for a single-member LLC, an operating agreement is highly recommended. This document establishes how the company will be managed and clarifies the separation between ownership and control. A single member manager-managed LLC operating agreement not only records the choice of management structure but also defines the manager’s duties, the scope of authority, and the member’s reserved powers. It also reinforces limited liability protections by demonstrating that the LLC is being operated as a distinct legal entity.

Single-Member and Multi-Member LLCs

In an LLC, the owners of the company are referred to as members. In a single-member LLC, there is one owner who acts and the member and manager in charge of daily operations. There are a few necessary formalities with a single-member LLC, and you can choose any title you are comfortable with. This type of business entity is considered a disregarded one and allows you to avoid the double taxation that a corporation faces. You will simply need to report the income on a Schedule C on your personal tax return. A multi-member LLC is similar to a single-member except that there are multiple members or managers.

Why Choose Manager-Management for a Single Member LLC

While most single-member LLCs are member-managed by default, some owners prefer a manager-managed structure. Reasons include:

  • Delegation of daily operations: Owners may appoint a trusted person to handle contracts, hiring, and routine business functions.
  • Remote business operations: If the owner lives in another state or country, a local manager can oversee day-to-day matters.
  • Succession planning: By naming a manager in the operating agreement, the LLC is less likely to face disruption if the owner becomes incapacitated or passes away.
  • Professional oversight: Some banks, lenders, or investors prefer to see a dedicated manager in place, especially if the owner lacks operational experience.

This flexibility allows the owner to retain control over major decisions while freeing up time to focus on strategy or other ventures.

LLC Management Structure

After setting yourself up as either a single- or multi-member LLC, you will be required to choose the management structure you wish your company to utilize.

Member-Managed LLC

This is the simplest and most basic LLC structure, and if a structure is not chosen, most states will default to this option. In this structure, all members will be involved in the decision-making process, and it will require a majority vote for entering into loans and contracts.

This can be problematic in the event of death or serious illness of one of the members, as it can cause the entire LLC not to be able to act as necessary. If a member passes away suddenly, it can also lead to management by the probate office or ownership being split among numerous heirs.

There are benefits to member-managed LLC, including:

  • Allowing members to be involved in day-to-day operations.
  • The members contribute to the product and business.
  • The members get to work directly with customers.
  • They are an easier choice for small businesses.

Manager-Managed LLC

When choosing a manager-managed structure, you will need to formally create a manager role that operates independently from the owners. While the members will have the responsibility for high-level and major decisions, the manager will be responsible for the running of the business in such functions as:

  • Hiring
  • Terminating
  • Entering into contracts on the business's behalf
  • Writing checks

The owners will retain the sole authority to:

  • Merge with or acquire another business
  • Get a loan
  • Process high-level transactions

When choosing a manager-managed LLC, you will need to include this decision when creating your company's articles of organization and operating agreement. When choosing a manager, it can be a member or independent manager who has a good head for business. This dedicated manager member will not need approval of the other members to make routine business decisions.

A manger-managed LLC can be the best option for those with many members or members that only wish to be investors and not be involved in running the company. It can also be a good option for those who wish to be members but lack the experience to run a company. This can be beneficial since many banks prefer to loan money to those who have business experience.

Those who feel it may be difficult to get all the members to agree on business decisions may find it best to have a manager, so the decision-making process is not too lengthy. Family businesses can also benefit from this structure. It gives parents the ability to bring their children into a business without necessarily giving them control.

Drafting a Manager-Managed Operating Agreement

A single member manager-managed LLC operating agreement should address:

  • Designation of management structure – Explicitly state that the LLC is manager-managed.
  • Appointment of manager(s) – Name the manager, whether the owner or another individual, and outline the process for replacement.
  • Scope of authority – Specify actions the manager can take independently, such as hiring staff, signing contracts, or overseeing operations.
  • Owner’s reserved powers – Clarify that only the owner can amend the agreement, sell company assets, merge the business, or dissolve the LLC.
  • Capital contributions and distributions – Document how funds are contributed and how profits are allocated, even if to a single member.
  • Tax matters – Indicate whether the LLC will be treated as a disregarded entity or elect another tax classification.
  • Transfer restrictions – Outline what happens if ownership changes hands, such as upon death or sale of interest.

By customizing these provisions, the agreement ensures compliance with state LLC laws and reduces the risk of disputes.

What Is a Director Managed LLC

In some states, you may be allowed a third structure option referred to as a director-managed LLC. In a director-managed LLC, the board of directors will have the ability to make the decisions for the business. If the LLC consists of one director, he will make the decisions. If there are multiple members on a board, it will require a majority vote to pass major decisions. A director is not required to be a member of the LLC.

Successor Management and Continuity Planning

In a single-member LLC, continuity planning is crucial. If the sole member also serves as the manager and becomes incapacitated or dies, the LLC could be left without authorized leadership. To prevent disruption, the operating agreement should:

  • Name a successor manager who will step in under specified conditions.
  • Define the successor’s authority, such as continuing operations, paying debts, or transferring ownership.
  • Allow for flexibility by including provisions that authorize temporary managers or powers of attorney.

Including these clauses protects the business from paralysis and provides stability during unforeseen events.

Frequently Asked Questions

  1. Do I need an operating agreement for a single-member LLC?
    Yes. Even though some states don’t require it, having an operating agreement protects liability status, clarifies management, and strengthens credibility with banks and investors.
  2. Can I appoint someone else as manager of my single-member LLC?
    Yes. You may designate another person as manager to oversee daily operations while you retain authority over major decisions.
  3. What should be included in a single member manager-managed LLC operating agreement?
    It should cover management structure, authority of the manager, owner’s reserved powers, capital contributions, distributions, tax treatment, and continuity planning.
  4. How is a manager’s authority limited in this structure?
    Managers typically cannot amend the operating agreement, sell major assets, dissolve the LLC, or take actions outside ordinary business without the owner’s consent.
  5. What happens if the sole owner-manager dies or becomes incapacitated?
    Without a continuity plan, the LLC could be left without management. A well-drafted operating agreement should appoint a successor manager to maintain operations.

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