Manager or Member LLC: Everything You Need to Know
A manager or member LLC refers to how a limited liability company (LLC) chooses to be managed. They can either be member-managed or manager-managed. 4 min read
A manager or member LLC refers to how a limited liability company (LLC) chooses to be managed. They can either be member-managed or manager-managed.
Once you've formed an LLC and filed all of the necessary paperwork, you'll still need to decide exactly how you will manage your business. LLCs are a newer type of business structure and are similar to corporations in some ways, but different in their management setup. While corporations are required to have a boards of directors with officers, LLCs have a lot of freedom in what they do.
With a member-managed structure, all of the owners (called members) of the LLC are also its managers. In a manager-managed LLC, only one or a selected few members will act as managers, or the company can bring in an outsider to manage or work with the managing members.
Small businesses, especially those that are family-run work well with a member-managed structure. LLCs with a large number of members, and those who want to remain only nominal member, will want manager-managed structures. Managers need to be involved in the daily operations of the business, so only choose a member-managed structure if all of the members are willing.
The owners of an LLC are called its members, and they are similar to the shareholders of a corporation or the partners in a partnership. They can own any percentage of the LLC, depending on the number of members the company has. LLCs can have any number of members.
An LLC with only one member is called a single-member LLC, whereas an LLC with two or more members is called a multi-member LLC. Some LLCs might choose to be taxed as S corporations in the eyes of the Internal Revenue Service (IRS). If they do elect that status, they won't be allowed to have more than 100 members.
In a member-managed LLC, every member is a part of the decisions made regarding the business, even daily issues. Because a large amount of LLCs are owned by only a few individuals, member management is usually a good choice for the LLC entity type.
A member-managed LLC is the right fit for you if the owners of your LLC want to take part in the regular business functions like:
- Making and selling products
- Offering and performing services
- Making hiring decisions
- Opening a store daily
- And other basic activities
Corporations tend to be much larger than LLCs with many hands-off investors, so a management structure that is separate from the company owners is a better fit for them.
When choosing the appropriate management setup for your business, you'll need to consider what the company can afford. Sometimes a member-managed structure is more affordable because it can require less hiring than a manager-managed LLC. You'll also need to consider the desires of every member of your company.
Sometimes the management structure will need to change if there is a change in the ownership of the company. Certain company decisions will need to be approved by all of the members, regardless of the management structure chosen for the business. These include issues like contracts or business loans.
If you choose to form a manager-managed LLC, the members will need to hand over their decision-making powers for most of the company's issues to a single manager or a management team. Managers can be members of the LLC, but they can also be third-party individuals or companies. In some cases, one LLC will act as the manager for another LLC.
In the case that only some of the members of your LLC are interested in being involved in the day-to-day operations of the business, you can choose a manager-managed LLC in which only a group of the members acts as managers.
Choosing Your LLC Management Structure
Most states assume that an LLC is member-managed when the business is formed. If you want to choose a manager-managed structure, you'll need to make that clear in the LLC's operating agreement.
The operating agreement should also clearly outline the compensation for any members who are also acting as managers. The members of an LLC are not paid salaries like employees would be, but when members act as managers, they can be paid for their positions. LLC members acting as managers will need to keep the company income that passes through to them separate from any compensation they receive for management duties.
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