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Should My LLC Be Member-Managed or Manager-Managed?

The LLC (Limited Liabiliy Company) is a fairly recent invention, compared to conventional corporations.  In fact, most states didn’t even recognize this particular entity until the 1990’s.  It’s late arrival hasn’t stopped it from being the vogue choice of entity type among Americans.  In terms of the primary function of an LLC, which is limited liability, the LLC behaves very much like the corporation.  But there are differences.  One of those differences is in management terms of the company.

How Are LLC’s Managed?

One of the primary differences between LLC’s and Corporations is in the management structure.  Corporations are owned by shareholders, whereas LLC’s are owned by Members.  Like Corporations, LLC’s may have more than one owner (member), or the LLC may be owned by only one owner, or member.

An LLC may choose to be managed by members (owners), or by some other non-member (non-owner) individual or group.  There is quite a bit of latitude here, and typically the operating agreement will delineate the details of the management structure and terminology.

What are Member-Manged LLC’s?

In a “member-manged” LLC, the members (or owners) generally dictate the day to day decision making.  As decision makers, these member/managers are construed by law as agents of the LLC and legally bind the company in a way that is typical of any agent acting on behalf of the company.  Of course, a single-member LLC member is able to bind and make contract on the entity’s behalf by himself.   But in multiple-member LLC’s, the members acting as managers typically must have a majority to contract on behalf of the company.  Most LLC’s meet this description of being member-managed.

What are Manager-Managed LLC’s?

In “manager-managed” LLC’s, the decision-making function is given up to the managers.  The members (owners) allow the manager, or managers, to act as an agent on behalf of the LLC.  The manager is typically able to open bank accounts and sign contracts on behalf of the LLC, as long as this function is clearly identified within the operating agreement document.  In other words, members should assign the rights of the manager prior to meeting any bankers, etc.

For those LLC do-it-youselfers, the member vs. manager-management decision may also be made with the state in which the company is being registered – at the time of registration.  Most state online LLC forms require the LLC organizer to make this “member or manager” distinction when applying with the state of creation.

Why Would a Company Need a Manager-Managed LLC?

A company might want to allow for the managers to make decisions on behalf of the LLC for a few reasons.  For starters, a complex organizational structure might necessitate non-owners (managers) to make decisions.  Members (owners) may not always be available for various tasks, like purchasing equipment on behalf of the company, opening bank accounts, and signing contracts. 

Also, some members of LLC’s are not actively involved in the company.  They may be investors only, and do not participate in the day-to-day activities of the LLC.  Obviously, this passive approach to LLC ownership may prevent the member from performing the various functions listed above.  Non-owner managers in this case, would be required to make these various decisions on behalf of the LLC. 

When Does The LLC Identify Itself As Member-Managed or Manager-Managed?

This decision should be made before the company forms, and the decision should be thoroughly documented within the operating agreement by an attorney.  Please tread carefully when making these type of decisions.  Of course, any LLC can be updated with amending documents with the state, and operating agreements held with the LLC.

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