The Definition of an LLC Managing Member

Member-managed LLCs

In a member-managed LLC, all owners (members) also act as managers who can serve as agents of the business and bind the business contractually. Specific responsibilities of individual members can vary depending on what the members of that particular business decide is best for the company.

A common question surrounding member-managed LLCs is whether an LLC can have more than one managing member, and the answer is yes. In fact, in many states, the default LLC management structure is one in which all members are also managers. In this instance, you must specifically set out in the LLC formation documents or operating agreement form that your business will be manager-managed.

Manager-managed LLCs

In manager-managed LLCs, LLC members are sole owners of the business. That is, they are not actively involved in the day-to-day operations of the business and do not have the authority to enter into contracts on behalf of the business.

For manager-managed LLCs, management is delegated to a separate nonmember entity, which may be an individual, several people, or another entity. Who may serve as managers of a manager-managed LLC is governed by state law.

Member-managed vs. manager-managed

When choosing between the two types of LLC management structures, you should weigh several factors to determine the best fit for your business. Many LLCs are formed because two or more individuals actually want to work together in a business, in which case, a member-managed LLC probably makes sense. That said, the following considerations often weigh more in favor of a manager-managed LLC structure:

• Members want to be only passive investors
• Members lack management skills and experience
• Members don't want to be involved in day-to-day operations and decision-making
• There are too many owners to effectively manage one company

Regardless of the type of structure you select, it is important to delineate the rights and obligations of LLC managing members in your company's operating agreement. You should pay special attention to the types of decision-making powers of managing members, such as personnel decisions and contractual authority, notably whether any additional approval beyond the managing members is necessary for certain decisions to take effect.

Note that the limited liability afforded to LLC members covers both managing members and non-managing members. Only LLC members, however, pay self-employment taxes related to the company; non-managing members are not subject to this tax.

When setting up an LLC, the managerial structure is among the most important decisions you can make because it affects the daily operations of the business and can also have tax implications. Meeting with an experienced professional before filing any documents with the state is advisable to get you started on the right foot.