When you start a limited liability company (LLC), you must decide if it will be member-managed or manager-managed. You typically need to include this information in your LLC’s Articles of Organization or similar state formation document.
This is a big decision for your company, so it’s important that you understand the differences between the two types and which one will work best for your business.
What Is a Member-Managed LLC?
In a member-managed LLC, the owners (known as “members” for an LLC) share responsibility for managing the day-to-day business of the company and making business decisions. An LLC’s operating agreement typically includes details about these responsibilities, but, in general, owners of a member-managed LLC have a management “voice” equal to their ownership share.
This is the most common management structure for LLCs (especially single-member LLCs) and generally the default election in most states if the formation document doesn’t specify the management type.
Advantages of a Member-Managed LLC
A member-managed structure is simple and straightforward. It also ensures that each owner of the LLC has a voice in the company’s operations.
This system works especially well with smaller companies that have only a few owners or less and who all express interest in participating in the day-to-day operations of the company.
What Is a Manager-Managed LLC?
In a manager-managed LLC, the owners create a separate management position (or positions) to handle the company’s day-to-day operations.
The manager can be an owner of the LLC or the company can hire someone from outside. The owners can determine which powers they want the manager to have and which powers they want to keep for themselves (e.g., “big-picture” decisions like mergers and capital raises).
Advantages of a Manager-Managed LLC
While not as common as member-managed LLCs, manager-managed LLCs have several potential advantages. These include:
- More Streamlined Management: If a multi-member LLC has more than a few owners, sharing day-to-day management responsibilities with so many people can prove inefficient, confusing, and impractical. Appointing a manager to focus on the company’s operations rather than spreading the responsibility among several people could be a more effective management strategy. Depending on the size of a company, the owners could appoint different managers for different parts of the business.
- A Way to Accommodate Passive Investors: Not all owners want to manage the company’s operations — particularly those who solely bought into the company as an investment. If an LLC has owners who prefer to remain on the sidelines, appointing a manager rather than having all the owners share management responsibilities would be a better choice.
- Highly Skilled Managers: Not every owner has the skills to serve as a strong manager of their company. With a manager-managed LLC, you can ensure you have the strongest managers possible running the company’s operations rather than handing responsibility to a less-experienced or less-skilled owner.
- An Attractive Option for Family Businesses: The manager-managed structure is popular with many family-owned LLCs because it allows additional family members to acquire an ownership stake without having to immediately handle the responsibility of managing the company.
- Enhanced Outside Investment Opportunities: Potential investors may prefer the more corporate-like structure of a manager-managed LLC when considering whether or not to invest in the company.
LLC Operating Agreement
An operating agreement is an essential part of starting and running an LLC. It is a legal document that provides an outline and details of the owners’ duties and responsibilities. It can cover several topics, including:
- Owners’ capital contributions
- Distributions to owners
- Membership change procedures
It’s important to include specific details about the management structure as well as each member’s and manager’s responsibilities in the operating agreement. This can include things like hiring power and purchasing power. Recording this information in a written, legal document can help solve potential internal conflicts that may arise while also eliminating confusion about who’s responsible for what.
If you need to make changes to your operating agreement — such as adding or removing members or managers, changing management responsibilities, or even changing the management structure of the LLC — you can file an operating agreement amendment that describes the changes.
NOTE: You must also amend your LLC's formation documents in order to change the company's management structure. This should be done with the state in which your LLC was filed.
For a more detailed overview of LLC operating agreements, read our What is an Operating Agreement article. If you want to create your own operating agreement, check out this free LLC operating agreement template.
Member-Managed vs. Manager-Managed LLCs: FAQ
Should a single-member LLC be member-managed or manager-managed?
For some single-member LLCs, the member-managed structure works best while others may prefer a manager-managed structure.
Some owners of single-member LLCs want to handle all management responsibilities themselves while other owners prefer to hire a manager to share the load. Consider your business’s needs, your skills, and the amount of time you’re willing and able to spend managing the business before you decide which management structure is best for your LLC.
What does member-managed LLC mean?
In a member-managed LLC, the owners share responsibility for managing the day-to-day operations of the company and making business decisions.
What does manager-managed LLC mean?
In a manager-managed LLC, the owners create a separate management position to handle the company’s day-to-day operations.
Can an LLC have two managing members?
Yes. In a multi-member LLC with a member-managed structure, all of the members are managing members.
Is a managing member an owner?
Yes. Owners of LLCs are called “members” so all managing members are owners of the LLC. But, in manager-managed LLCs, the managers often come from outside the business and aren’t owners.
Are managers of an LLC liable?
Liability laws for LLCs vary from state to state, but an LLC’s corporate veil typically protects managers from personal liability for the company’s debts.
Do LLC managers have fiduciary duties?
An LLC manager’s fiduciary duties are generally outlined by a state’s LLC laws as well as an LLC’s operating agreement and the manager’s employment contract.
Typically, LLC managers must act in good faith when making business decisions and put the LLC’s interests above their own.
Does the management structure of LLCs affect taxes?
No. An LLC’s management structure won’t affect how it’s taxed. Learn more about LLC tax options with our LLC tax guide.
Can you change an LLC’s management structure?
Once the change is approved by the LLC’s members, you can generally change the management structure of an LLC by resubmitting its formation documents with the state and amending its operating agreement.
Can a member-managed LLC have a manager?
In a member-managed LLC, the members also are the managers.
What is a director-managed LLC?
In a director-managed LLC, a board of directors manages the operations of the company. A director-managed structure is available in some states.