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LLC Member Vs Manager

When you start an LLC, you’ll need to decide early on who will manage it: members or managers? In a member-managed LLC, members (owners) are responsible for the LLC’s day-to-day operations. In a manager-managed LLC, members appoint or hire a manager or managers to run the business. Whoever manages your LLC will be able to open and close bank accounts, hire and fire employees, enter contracts, and take out loans. It’s a serious decision.

So what’s the right management structure for your LLC? It depends on factors like the size of your LLC, how available your members are, how much control you’d like to keep, and your privacy concerns. Here’s an in-depth look at both management structures.

What is a member-managed LLC?

A member-managed LLC is what it sounds like: an LLC managed by members. The members of an LLC are the owners. In a member-managed LLC, the members make decisions about day-to-day operations together. What will your marketing strategy be? Where will your business bank? What snacks will you never allow your breakroom to run out of? In a member-managed LLC, the business owners decide everything.

In many states, member-managed LLCs are the default. This means that if you don’t specify otherwise in your LLC operating agreement or Articles of Organization, your LLC will automatically be member-managed.

Most LLCs are member-managed. Unlike corporations, LLCs aren’t bound by strict organizational rules (no board of directors required!). This flexibility works well for smaller businesses that don’t need (or can’t yet afford) to pay employees. So LLCs tend to attract business owners who desire direct involvement in their business.

Why Have a Member-Managed LLC?

You like being in control—even over the details.

In a member-managed LLC, members have a say in every decision, big or small. Members decide everything from “should we buy this old warehouse and convert it into a hip office?” to “what color should our logo be?” It makes sense for anyone who wants to be involved in all aspects of their business.

You like working with your fellow members.

People often start LLCs because they have a vision and work well together. If that’s the case, it may be faster and easier to make decisions together on the fly, without the need to train and involve a manager.

You want to keep costs down.

In a member-managed LLC with default taxation, members are business owners, not employees. Any income you make from your LLC comes to you as a distribution, not a wage or salary. But in a manager-managed LLC? Managers are usually considered employees. Even member-managers typically get a salary in addition to regular distributions. And having employees means setting up payroll and withholding taxes. It’s a whole thing. If you don’t hire a manager, you can save your business a lot of money.

Your LLC is small.

Member-managed LLCs are simpler. Their straightforward structure makes them a good fit for small businesses (like single-member LLCs) and businesses that are just starting out.

What is a manager-managed LLC?

In a manager-managed LLC, members (owners) hire managers to run the business. Managers are typically considered employees and receive a salary for their work. A manager could be a member, an outside individual, an LLC, a corporation, a management company, or any combination thereof. In any case, in a manager-managed LLC, members cede some decision-making power to managers. The manager sits in the driver’s seat and the members take on a more passive role.

Manager-managed LLCs work well for large businesses with many members. They also make sense for an LLC with members who see themselves as investors rather than workers.

Why Have a Manager-Managed LLC?

You’re trying to attract investors.

Your LLC members might not have the time or desire to handle daily business operations. Maybe your members view themselves as passive investors, like a shareholder in a corporation. In that case, do they want to be involved in deciding what to do about the employee who won’t stop stealing toilet paper? A manager can handle the details while your members focus on big picture stuff.

Your LLC is large.

If your LLC has 147 members, you probably don’t need to gather them all for a vote when you decide whether to hire a janitor. Depending on your LLC’s size, it may be impractical and inefficient to involve everyone in mundane decisions.

You like agility.

Without the need to gain a consensus from all members, managers can act quickly and decisively. This can streamline operations and make your business more nimble.

You’re concerned about privacy.

Unfortunately, in most states, you’ll need to list your members or managers on public documents. If you hire a manager, you can list their information here instead of your own, which can protect the privacy of your members.

By the way, we can help protect your privacy, too. Check out our Privacy by Default page to learn more.

 

LLC Members and Managers FAQ

Do I need to document my LLC's management structure?

Yes. Some states require you to specify your management structure on your LLC Articles of Organization. Other states leave it up to you to include it in your LLC Operating Agreement. In most states, if you don’t document a choice, your LLC will be a member-managed LLC by default and subject to the default rules of your state.

What is a managing member of an LLC?

If one or more of your LLC members wants to act as a manager, you can name that person a “managing member.” In a member-managed LLC, all members act as managers and it isn’t necessary to name anyone a managing member. But a manager-managed LLC can designate one or more owners as managing members. A managing member can manage the business alone, alongside other managing members, or with an outside manager or managers.

What is a governor in an LLC?

A governor in an LLC is someone who has decision-making power in the business. A governor could be a manager or a member, depending on how your LLC operates. Currently, only Washington, Idaho, and D.C. use the term “governor” to describe who runs the business.

How many managers can an LLC have?

There is no limit to how many managers an LLC can have. Go crazy with managers, if that’s your thing.

Is a single-member LLC manager-managed or member-managed?

A single-member LLC (an LLC with only one owner) can be either manager-managed or member-managed—it’s up to the owner. The owner can run the LLC themselves or name a manager to handle daily operations.

Are LLC members employees?

Not generally. An LLC member is an owner, not an employee. Employees make a salary/wage, require setting up payroll and withholding taxes. By default, all LLC income “passes through” to the members and is considered self-employment income. An LLC member can pay themselves through something called an owner’s draw, but that’s not considered a salary.

However, an LLC member hired to take on management duties (a managing member) can be an employee. In that case, the managing member can be compensated like an employee, but this should be well-documented in your LLC’s operating agreement.

Are LLC members considered employees in an S-Corp?

Yes. If your LLC is taxed as an S-Corp, your LLC members who provide services for your business are W-2 employees and must receive reasonable compensation.

For more on this topic, see our page on S-Corps Vs. LLCs.

Now that you know the difference between member and manager-managed LLCs…

 

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