Key Takeaways

  • The two primary types of LLC members are managing members, who actively run the business, and passive or investor members, who contribute capital but do not manage daily operations.
  • LLCs can be structured as member-managed or manager-managed, which determines how decisions are made and who has authority.
  • Members can be individuals, corporations, other LLCs, or even foreign entities, depending on state law and the operating agreement.
  • Additional member categories include founding members, minority members, and non-voting members, each with different rights and responsibilities.
  • Titles like President, CEO, CFO, or Managing Director can be used to clarify roles internally and externally, even if they are not legally required.

Companies have different types of LLC members, depending on how the owners decide to structure the business. In many ways, a limited liability company's management structure is similar to that of a corporation. An LLC, however, offers more flexibility.

Choosing a Member-Managed or Manager-Managed LLC

Limited liability companies are formed at the state level with no involvement from the IRS or federal government. You form an LLC by creating Articles of Organization and filing them with the state. In these articles, you designate which type of management structure you want to use to run your LLC: member-managed or manager-managed. Common LLC structures include two or more family members going in together on a family business or two or more parties that are not related joining together in a business venture.

In LLCs owned by more than one family, you can have one representative from each family act as members in the business. Individual family members can have their own interest in the business separate from the LLC.

Understanding the Different Types of LLC Members

While LLCs are flexible in how they’re structured, understanding the types of LLC members and how they operate is crucial before forming your company. Members are the owners of the LLC and can take on various roles depending on their level of involvement, the capital they invest, and the terms of the operating agreement.

Here are the main categories of LLC members to consider:

  • Managing Members: These members are actively involved in daily business operations, decision-making, and signing contracts. They often hold leadership titles and serve as the public face of the company.
  • Passive or Investor Members: Also called silent partners, these members typically contribute capital but do not manage daily operations. Their involvement is financial rather than operational, though they may retain voting rights on major business decisions.
  • Founding Members: These are the original individuals or entities who create the LLC. They often hold significant ownership percentages and decision-making authority.
  • Minority Members: Members with a smaller ownership percentage who may have limited influence over company decisions but still share in profits and losses.
  • Non-Voting Members: These members invest in the LLC but waive their right to vote on business decisions, often in exchange for specific financial benefits or limited liability.

It’s important to clearly define each member’s role and rights in the LLC’s operating agreement. This helps prevent disputes, outlines profit distribution, and ensures compliance with state laws.

Member-Managed LLC

The most common form of LLC is a member-managed LLC, in which the owners participate in the day-to-day operations of the business. This is a common approach for small businesses that might not have the resources to employ separate management to perform operations. It's also frequently chosen by owners who want to be directly involved in managing and operating their business.

An LLC does not have the same organizational requirements, such as officers and a board of directors, as other business structures.

In most states, your LLC will default to the member-managed structure if you don't specify otherwise when filing your formation documents or operating agreement. In a member-managed LLC, it is advisable to have an operating agreement outlining such things as:

  • The members' voting rights.
  • How additional capital contributions will be handled.
  • Provisions for the buyout or transfer of ownership.
  • Other management and operational issues.

While all the members will have decision-making abilities in the company, contracts and loan arrangements most often require the approval of the majority of the LLC members. An operating agreement can help outline the process for handling these decisions and reduce the risk of conflict over business issues.

If an LLC is a single-member LLC, the sole owner is considered the one managing member. This individual can be referred to as a member-manager, manager, or any other officer title.

Membership Eligibility and Ownership Rules

The flexibility of an LLC extends to who can become a member. Most states allow a wide range of individuals and entities to hold membership interests, including:

  • Individuals: U.S. citizens, residents, or even foreign nationals can become LLC members.
  • Business Entities: Corporations, other LLCs, partnerships, or trusts can also own membership interests.
  • Foreign Entities: Non-U.S. businesses or individuals may be permitted to join, though additional registration or tax requirements might apply.
  • Minors or Estates: In some states, minors or estate representatives may hold membership, though restrictions may limit their decision-making powers.

Membership shares can be granted in exchange for cash contributions, property, services, or a combination of these. Each member’s percentage of ownership typically reflects their investment, but profit-sharing can be structured differently if outlined in the operating agreement.

Manager-Managed LLC

You can also have what is referred to as a manager-managed LLC, in which the members designate specific members or third parties, known as managing members, to engage in the day-to-day responsibilities of running the business. Typically in this business structure, the other members prefer to be more passive investors who do not want to have the responsibility of operating and managing the company. Individuals you can name as managers include:

  • Designated members.
  • Designated nonmembers or outsiders.
  • A combination of members and nonmembers.

Some companies prefer the manager-managed structure, and in some states, you can even have other LLCs or corporations responsible for managing your LLC. These managing entities are typically paid executives who have had the experience of operating similar types of businesses. When a company has a manager-managed structure, the non-managing members will not participate in daily business functions and will not have the authority to enter the company into binding contracts.

There are two situations in which owners might find the manager-management structure more favorable, such as:

  • If the business is too large, diverse, or complex to be able to divide management out among members.
  • If the members lack the experience or skills to manage the company properly.

If you choose a manager-managed structure, you can benefit from having managers running the business who are skilled in that area. When choosing this structure, you are required by law to indicate this choice on the LLC's organizational documents. This can be in either the Articles of Organization you file when you form your LLC or outlined in the Operating Agreement.

When drafting your Operating Agreement, some management rights your members might want to retain include:

  • The ability to replace the managers.
  • The ability to make all major decisions.

Common LLC Titles and Governance Roles

Although LLC law does not require corporate-style titles, many companies adopt them to clarify roles, especially when dealing with banks, investors, or clients. These titles can vary widely but commonly include:

  • Chief Executive Officer (CEO) or President: The primary decision-maker responsible for the overall direction of the business.
  • Chief Operating Officer (COO): Oversees daily operations and implements the company’s strategic goals.
  • Chief Financial Officer (CFO): Manages finances, budgeting, and reporting.
  • Managing Director or Managing Member: A member or non-member appointed to lead business operations and make high-level decisions.
  • Vice President or Secretary: Support executives in administrative and strategic functions.

Assigning titles does not change the legal rights or responsibilities of members under state law, but it can help establish authority and improve external business relationships.

Frequently Asked Questions

  1. Can an LLC have different classes of members?
    Yes. Many LLCs create classes with varying voting rights, profit shares, and responsibilities. This flexibility allows customized ownership structures.
  2. Can a company or trust be an LLC member?
    Yes. LLC members can include corporations, other LLCs, partnerships, trusts, and even foreign entities, depending on state law.
  3. Do passive members have liability protection?
    Yes. Passive or investor members enjoy the same limited liability protection as managing members, provided they don’t personally guarantee company debts.
  4. Are member titles legally required?
    No. Titles like CEO or Managing Member are optional but helpful for clarifying roles and presenting a professional image.
  5. Can non-voting members still receive profits?
    Yes. Even without voting rights, non-voting members are entitled to their share of profits as defined in the operating agreement.

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