LLC Members And Managers
LLCs are typically managed by either members or managers. The District of Columbia and a few states like Idaho and Washington use the word “governor” to describe the management authority of an LLC. In these states, the governors are still either members (for a member-managed LLC) or managers (for a manager-managed LLC).
Some states require LLCs to declare whether they’re member-managed or manager-managed in their Articles of Organization, and others leave this information for the operating agreement. In either case, your management style should be determined before your LLC starts doing business. There isn’t a one-size-fits-all management style that works for all types of LLCs. Whether you want to form a member or manager-managed LLC depends on the specific needs of your business. Each management style also needs to address different points in the operating agreement.
Not sure where to begin? Read on for an explanation of each management style, their advantages, and downloads of operating agreement templates specific to each management type. Or, learn how Northwest can help you start an LLC today fpr just $100 plus state fees.
What is a member-managed LLC?
A member-managed LLC operates much like a partnership. The owners (LLC members) manage the business directly. Each member has voting rights and participates in the decision-making process. The exact way in which this works may vary depending on the laws of the state and your LLC’s operating agreement. For instance, some decisions may require unanimous agreement (such as the acquisition of another company) while other decisions may require a majority vote or may be made by any individual member.
Why have a member-managed LLC?
There are a few key advantages to forming a member-managed LLC:
- Control: In a member-managed LLC, members have a voice in how the business is run. If you appoint a manager, you give up your own decision-making power. (Note that you’re not completely powerless though—LLC members still have the authority to vote out a manager.)
- Convenience: Only have a few LLC members? Are you already working closely together running the day-to-day operations of your business without disputes? In this case, it may be faster and easier just to make decisions yourselves directly. If you hired an outside manager, for instance, you would need to take the time to teach that person about your business and goals.
What is a manager-managed LLC?
In a manager-managed LLC, the power to make decisions is vested in one or more managers. In other words, members authorize the managers to make decisions on behalf of the LLC.
A manager can be a member—but doesn’t have to be. For instance, a manager can be hired by the LLC. In this case, the manager would be an employee and receive compensation. If a manager is also a member, they have two roles in the business. They can receive compensation for their roles as a manager, but this compensation is unrelated to their status as a member.
Why have a manager-managed LLC?
Manager-managed LLCs offer a few different benefits that may be more appealing to business owners that are less hands-on:
- Availability: Sometimes LLC members don’t have the time or availability to invest in daily operations. For instance, members might have other jobs or businesses or may travel frequently. In this case, members may want to take more of a passive role in the business, much like a shareholder in a corporation.
- Size: If your LLC has a lot of members, it’s not always practical to get everyone together to make decisions. Besides the actual logistics of coordinating large meetings, it’s pretty inefficient to have a hundred people voting on relatively mundane decisions, even infrequently.
- Privacy: In most states, you’ll have to list either your members or managers on public documents, such as your Articles of Organization or annual report. By listing managers instead of members, the LLCs members can better maintain their privacy.
What is a single-member LLC?
Are you the only member in your LLC? Then you have a single-member LLC. A single-member LLC can be either member or manager-managed, but this business type deserves special attention for another reason: taxes.
Single-member LLCs are taxed differently than an LLC with multiple members. Unless the LLC elects to be taxed as a corporation, a single-member LLC is considered a “disregarded entity” by the IRS. This means that the activities of the LLC are included on the member’s personal tax return, much like a sole proprietorship.