Manager-Managed or Member-Managed LLCs - What's the Difference?
I get this question a lot from people looking to form LLCs, especially when there’s just a single owner, or only 1-2 owners. There are some neat things you can do with a manager-managed LLC … if you know the tricks!
In a member-managed LLC, everyone gets an equal say … on everything. If you’ve got more than 2 members, that means a lot of people potentially out there acting on behalf of the LLC. Remember, in a member-managed LLC everyone can sign checks and everyone can sign contracts …
In a manager-managed LLC, you have established a two-level system. The managers are the people/entities that have control over the business operations of the LLC. They’re performing the same actions as the General Partner in an LP would, or the Officers in a Corporation. The members in this situation are passive, and act like shareholders or limited partners. They don’t have the right to sign checks or enter into contracts … making this a really great structure where you’ve got people who want to be very active in a business, and others who just want to go along for the ride.
It’s a great structure for a family, where Mom & Dad want to grow the business and involve the kids, passively, but don’t want the kids to be selling the business’s assets to buy new xBox games! In that sense you could use it like a limited partnership - but to be fair, the law around LLCs is nowhere near as settled as it is around LPs, where the General Partner has rock-solid control over how the LP operates.
I also like manager-managed LLCs for future growth. If you are looking at expanding a business down the road and need new capital, and your funding source won’t settle for just a good loan rate, you can bring in that funding source as a member. They get the equity interest they are looking for, but without also being a named Manager, you still have control over how the business is run.
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In a previous post (February 24 ?) you stated… “LLC/LPs are both considered separate and distinct from you. You aren’t responsible for the debts of LLC/LPs and vice-versa.”
What about the situation of a one-member LLC. Wouldn’t this be the same as a sole propietroship? If not, could you please explain.
Also, can you elaborate on how one does an LLC and then elects to file as a C or S corporation. Does the LLC go into the corporation? Additional info would be appreciated on this scenario.
Thank you, Danika
These would be some great questions to post over at the First Class Lounge forum. If you’re not yet a member, you can try it out for 30 days free.
Thank you for your clear commentary on Manager Managed and Member Managed LLCs
I created an LLC this month and set myself up as Managers/Managing members
I am now creating an Amendment to add my two cousins, my partners, owners, founders, etc Us three have all added Captial of our own
The Amendment asks that i distinguish Manager or Managing Member
From your Commentary, I am pretty sure we want to be Manager Managed LLC We want to always have full control and also bring in more capital of our investors We want to keep full control
As a Manager Managed LLC, shall I say we are “Managers” on the Amendment Form We also own and have money in the LLC
Thank you,
Bill
The Florida Department of State Replied to this Comment saying
Manager is someone you hire to run the company.
Hi Bill,
If you are bringing in the family members as investors, who won’t be involved in the day-to-day running of the LLC, then you definitely want them to be members, rather than managers.
Calling people managing members will confuse things. Sometimes when you have an LLC with a whole bunch of owners, you don’t want every single person calling the shots, so you designate 1-5 members as the Managing Members, and leave them in control of running the business. While they perform the same function, essentially, as a Manager, the two terms don’t quite mean the same thing legally. A Manager-managed LLC is one that has legally created a distinction between who can operate the company (the Managers) and who can own the company (the Members). All of the owners are Members, but only the owners who have been appointed to run the company may also be Managers.
Megan