Key Takeaways

  • A member-managed LLC means all owners (members) actively participate in running the business and can bind the LLC legally.
  • It is the default structure in most states unless otherwise specified in the Articles of Organization or Operating Agreement.
  • Best suited for small businesses with few members who want hands-on control over operations.
  • Advantages include simplicity and equal participation; disadvantages include potential decision-making bottlenecks and difficulty attracting passive investors.
  • A manager-managed LLC delegates authority to one or more managers (who may or may not be members), allowing some owners to be passive investors.
  • The choice of management style should be documented in the LLC’s operating agreement, which should outline voting rights, fiduciary duties, and decision-making powers.

Member Managed LLC

Member-Managed LLCs are when the owners (members) of the limited liability company are able to bind the limited liability company contractually. In addition, the members run the day-to-day business. It’s different than a manager managed limited liability company where a professional manager manages the day-to-day business.

Advantages and Disadvantages of a Member-Managed LLC

A member-managed LLC offers several benefits for small businesses and closely held companies. The structure allows every owner to participate directly in day-to-day decisions, fostering transparency and collaboration. Since members act as the company’s agents, they can sign contracts, make purchases, and represent the business without additional approval layers.

Advantages include:

  • Simplicity – No separate management tier, reducing operational complexity.
  • Equal involvement – All members have a voice in running the company.
  • Cost efficiency – Avoids the expense of hiring outside managers.

Potential drawbacks include:

  • Slower decision-making – Major actions may require unanimous or majority votes.
  • Risk of disputes – Differing management styles can lead to conflicts.
  • Investor reluctance – Passive investors may avoid businesses requiring hands-on participation.

Because of these pros and cons, this structure works best for small groups where all owners want to be actively engaged and share common goals.

Member or Manager Managed LLC

Either a limited liability company is managed by its members (owners) or it is managed by a professional manager. There are no laws requiring a limited liability company to be managed by its members.

“Management” of a limited liability company can be defined as having the ability to do the following:

• Make legally binding and financially significant decisions

• Open, close and manage banking relationships and accounts

• Enter into contracts and sign agreements

• Buy and sell real estate, investments, vehicles or any other financial asset

• Divest or dispose of any of the limited liability company’s assets

• Borrow money and obtain financing terms and agreements

• Hire employees, staff, contractors and consultants

In order to simplify management, only one member of a multi-member limited liability company is often designated as the manager. This is especially true if not every member wants to be involved.

An operating agreement can provide another avenue for the corporate structure. While operating agreements are not required in any state, they are highly recommended by most experienced professionals. It can clarify things for everyone involved before it becomes an issue.

How to Choose Between Member and Manager Management

The choice between member and manager management should be based on your LLC’s size, complexity, and ownership structure. If your members want to be directly involved and have complementary skill sets, a member-managed format may be ideal. Conversely, if you anticipate passive investors, have members lacking management expertise, or expect operational complexity, a manager-managed LLC may better serve your needs.

Key considerations when choosing:

  1. Member expertise – Do all members have the skills to manage effectively?
  2. Business scale – Will a larger operation benefit from centralized decision-making?
  3. Investor involvement – Are some owners strictly capital contributors?
  4. Decision speed – Do you need rapid approvals without group consensus?

Regardless of your choice, clearly documenting the management structure in your operating agreement helps prevent disputes and ensures compliance with state filing requirements.

Member Managed LLC

Member managed is more common because many businesses have limited resources (with which to hire management). Member-managed just means that all the members have the ability to bind the limited liability company into legal agreements. In fact, all members are agents of the limited liability company. This means that all members can bind the company. Member managed limited liability companies don’t have either officers or board of directors.

If your dream is to run your own business, then this is the way to run it.

Manager Managed LLC

Manager managed limited liability companies are managed by a professional manager. That manager has control over the activities of the business. The members do not have control over the day-to-day business. A dedicated professional manager is able to make decisions quickly, without having to ask members for their opinion or input. Limited liability companies that are manager managed relinquish authority to the manager or managers, who are legal agents of the company.

The professional manager does not have to be a member of the limited liability company, but they can be a member. If the members want to own a business but not actually manage the business, then this is the perfect structure for your limited liability company. However, management is not optional. Someone must manage the business. The legal requirements can be significant, so it’s best to get a lawyer to help walk you through the process and documentation.

Operating Agreement Provisions for Each Structure

An LLC’s operating agreement should reflect its management style in detail.

  • For a member-managed LLC, include:
    • Voting rights and procedures for routine and major decisions
    • Fiduciary duties owed between members
    • Rules for additional capital contributions
    • Buyout and transfer-of-interest provisions
  • For a manager-managed LLC, also specify:
    • The scope of the manager’s authority (e.g., hiring, purchases, entering contracts)
    • Limitations on manager powers (e.g., actions requiring member approval)
    • Compensation or profit distribution for managers if applicable

Without a tailored operating agreement, state default laws apply, which may not align with your business goals. Customizing these provisions helps ensure smooth operations and minimizes legal disputes.

Frequently Asked Questions

  1. Is a member-managed LLC the default in most states?
    Yes. Most states designate LLCs as member-managed by default unless otherwise stated in formation documents.
  2. Can a member-managed LLC have passive investors?
    It’s uncommon, as all members typically have management duties, but it is possible if agreed upon in the operating agreement.
  3. Who can be a manager in a manager-managed LLC?
    Managers can be members, nonmembers, or professional managers hired externally.
  4. Do I need an operating agreement for a member-managed LLC?
    While not always required, it’s strongly recommended to outline member rights, responsibilities, and decision-making procedures.
  5. Can a single-member LLC be member-managed?
    Yes. In fact, most single-member LLCs are member-managed, as the sole owner naturally oversees daily operations.

If you need help with forming a new business, limited liability company, any other corporate structure or any legal need, you can post your legal need or post your job on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.