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.
Should a single-member LLC be member-managed or manager-managed?
Single-member LLCs are generally member-managed, but the sole owner can appoint a manager if they don’t want to participate in the management of the company for some reason.
What’s the difference between member-managed and manager-managed LLCs?
In a member-managed LLC, the owners (also known as “members”) share responsibility for managing the day-to-day operations of the company. In a manager-managed LLC, the owners appoint a manager (or managers) to handle the operations. These appointed managers can, however, be owners.
Can a member-managed LLC have a manager?
In a member-managed LLC, the members also are the managers.
How do I change from a member-managed to manager-managed LLC?
After voting on and approving the change in accordance with the rules outlined in the LLC’s operating agreement, you will need to amend and resubmit the formation document to the appropriate state office and also amend the operating agreement.
What are the tax implications of choosing a member-managed vs. manager-managed structure?
The type of management structure you choose for your LLC will not affect how it is taxed. Read this LLC tax guide to learn more about tax options for LLCs.
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.