Managing Member: Everything You Need to Know
A managing member is a person who is involved in the daily management of a company. 3 min read
Updated November 4, 2020:
Who Is a Managing Member?
A managing member is a person who is involved in the daily management of a company. The managing member has an interest in the business as an owner. This person is also in an authoritative position that allows him or her to represent the company in contract negotiations and agree to the terms of a binding contract.
Pros for Choosing a Manager-Managed Operation
- Choosing a manager-managed operation is a benefit for members who wish to be part of a company but prefer to maintain a low-key presence due to a lack of management experience or specific skills.
- Unlike an LLC that is member-managed and allows all members to participate, a manager-managed LLC consists of a group of designated members or a non-member.
- Another reason to choose a manager-managed structure is to avoid having multiple members at the helm serving as managing members and providing input that can affect the efficient operation of the company.
Pros of a Managing Member LLC
As a managing member, responsibilities include the direct operation of the business, purchasing and selling property owned by the company, agreeing to binding contracts, and the hiring and firing of employees.
Health insurance benefits for a managing member are exempt from income tax.
Cons of a Managing Member LLC
When managing members receive their share of distributed revenue from the business, they are responsible for paying self-employment tax. Currently, the self-employment tax is 15.3 percent.
Any earnings accrued by a managing member of an LLC is considered gross income. This income is subject to taxes.
- Is there a difference between a member-managed LLC and a manager-managed LLC?
Yes. A member-managed LLC is active in the daily operations and management of the business. They take on the role of agents representing the company and have the authority to agree to binding contracts. With a manager-managed LLC, the members are not involved with the daily management of a business and do not serve as agents or representatives. That responsibility is entrusted to managing members.
Authority to agree to contracts may also be appointed to a non-member. However, even in a manager-managed LLC, members do have the authority to replace a manager and make certain other important company-related decisions.
- Do managing members of an LLC have any liability?
In general, as a limited liability company, an LLC offers its members some protection from liability. This includes both managing and non-managing members. However, a managing member of an LLC is still liable if their own actions negatively affect the business. For example, a managing member whose intentional behavior or negligence causes another person to be injured can be held liable, personally, for their actions.
- What are the different LLC ownership structures?
There are several ways to break down an LLC's ownership structure. Some LLCs are a family business owned by at least two family members. Non-related parties of two or more may also own a business together, or there can be a single-purpose managing member joined by at least one other member and a managing member.
- What is an Operating Agreement?
An Operating Agreement is given by managing members to management. It serves as a document that is designed to reserve decision-making to specific parties. The agreement is also used to identify the members and outlines the rights of the members.
- Are there any class distinctions among members of an LLC?
Yes. An LLC can have members only or it may have managing and non-managing members. Among the members, there are different classes. For example, one class may have preferred rights that supersede the rights of other classes. Another class may have roles as decision-makers, while other classes have no rights or limited rights. There are members who have the responsibility and control to make decisions.
- Who approves major decisions?
The approval for major decisions is generally outlined in the Operating Agreement. The types of decisions involved include major leases, the sale of property, capital expenditures, financing, new business, capital, and operating budgets. The agreement may also specify the procedure for any decisions to be made about insolvency or filing for bankruptcy. The Operating Agreement may stipulate a specific breakdown for approvals, such as a majority vote by members, a two-thirds or higher approval rate, or the requirement that all members approve.
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