Member-managed vs. manager-managed LLC: Differences, pros and cons

Cat McAlpine

BLUEPRINT

Published 7:32 a.m. UTC Feb. 20, 2024

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When starting your limited liability corporation (LLC), one of the first things you’ll have to do is decide what kind of LLC you want to build. Some are small ventures run by one person or a family. Others are companies owned and managed by a group of people.

While LLCs come in a variety of shapes, sizes and functions, you’ll ultimately need to choose between one of two designations: member-managed or manager-managed. Read on as we explore the pros and cons of member-managed vs manager-managed LLCs.

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What is a member-managed LLC?

The owners of an LLC are referred to as members, whether the business is owned by one person or several. The management of the business can be handled by the members or by someone who is hired specifically to take on the management role.

In a member-managed LLC, every member is involved in the decision-making and management of the business, from big choices to daily tasks. These decisions are typically made by majority vote.

Member-managed LLC pros

A member-managed LLC allows every one of the owners to have an influence over what happens at the company. It can create a collaborative, team-oriented environment for those who work well together and are passionate about the LLC. Member-managed LLCs can also be easier to start.

Member-managed LLC cons

It can be difficult to gather a large number of members and have them weigh in on important decisions, making member-managed LLCs less efficient than manager-managed. Additionally, every owner of the LLC gets a say in how the business is operated, no matter what percentage of the business they own.

What is a manager-managed LLC?

A manager-managed LLC identifies a manager to run the business for most day-to-day duties. A manager can be one or more of the members, an outside party hired as an employee or even a business entity. You’ll need to check your state’s laws to identify which kinds of business entities can act as a manager.

There is no limit on how many managers you can designate, and for large companies it may be very necessary to have a large number of managers with different duties. Keep in mind that for manager-managed LLCs, only managers can enter and bind contracts, while non-managing members cannot bind the company to contracts without written permission.

Manager-managed LLC pros

This option is good for family-run businesses where members may be non-active, less-active or want to support the business without being heavily involved. These are sometimes called passive investors. For example, family-run businesses often involve parents and children, where parents are much more active participants in the business than their children are.

In this instance, the parents might decide to manage the company while their children maintain status as less active members. Additionally, manager-managed LLCs are typically more enticing to potential investors. A professional manager can lend a sense of guidance and security akin to a company having a board.

Manager-managed LLC cons

Once you’ve chosen a manager-managed LLC, any owners who are not part of the management process will give up a lot of their authority over the business. In this instance, only the manager can perform some functions like entering the business into contracts, managing finances or hiring and firing employees.

If you choose not to be involved in management, you may find yourself losing touch with your business and no longer having expertise in the daily operations.

Member- and manager-managed LLC similarities?

Whether you choose a member- or manager-managed LLC, the percentage of ownership each member has does not change. Either choice is also beholden to the articles of organization and the operations agreement.

Member- and manager-managed LLC differences?

A member-managed LLC is led by all of the members (or owners), while a manager-managed LLC is led by either one or two designated members, an employee who has been hired for the task or a business entity. In the case of a manager-managed LLC, members do not have as much authority over the day-to-day business.

Which is best for your business?

You will want to decide what kind of management structure you want for your LLC before you begin conducting business. It’s smart to put together an Operating Agreement that details who has what powers, responsibilities and voting rights. But when should you choose one type of management over the other for your LLC?

When should you choose a member-managed LLC?

A member-managed LLC works best for a small company where the members want to be actively involved. It’s a great choice if you have a team that likes to work together and wants to contribute to the overall business. If you are a single-member-owned LLC, it is important to be aware that you are at risk of greater liability if your business is member-managed.

When should you choose a manager-managed LLC?

Manager-managed LLCs are best for very large, complicated businesses or any size business that would like to have passive investors. Most states default LLCs to a member-managed organization, so if you want to use a manager-managed model, you’ll have to state so in your articles of organization.

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Via ZenBusiness’ website

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Via Northwest’s website

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Frequently asked questions (FAQs)

Member-managed LLCs gain some tax advantages from the IRS, including the option for S-corp tax status. If you are not involved in the business as a manager and elect someone else to manage the business, then you may not be subject to self-employed taxes.

You’ll need to amend your articles of organization to change your LLC from manager-managed to member-managed. You will also need to review your operations agreement, so you know how members should vote to put the change in place. Different states require different results in order to authorize a change. Some states may require a majority vote, while others may require a unanimous one.

Owners and managers are not always the same. LLC owners are also referred to as members. Any number of members can be chosen to manage an LLC, but the manager can also be an outside employee who holds no ownership of the business.

Yes. A manager does not have to be a person. The role can be taken on by a business entity.

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Cat McAlpine

BLUEPRINT

Cat McAlpine is a writer and marketer based in Columbus, OH. She uses her expertise to support small businesses and arts organizations in her city.

Sierra Campbell

BLUEPRINT

Sierra Campbell is a small business editor for USA Today Blueprint. She specializes in writing, editing and fact-checking content centered around helping businesses. She has worked as a digital content and show producer for several local TV stations, an editor for U.S. News & World Report and a freelance writer and editor for many companies. Sierra prides herself in delivering accurate and up-to-date information to readers. Her expertise includes credit card processing companies, e-commerce platforms, payroll software, accounting software and virtual private networks (VPNs). She also owns Editing by Sierra, where she offers editing services to writers of all backgrounds, including self-published and traditionally published authors.