Difference between Member-Managed and Manager-Managed LLC

When forming an LLC, you must decide whether it will be Member-Managed or Manager-Managed.

What is a Member-Managed LLC?

A Member-Managed LLC is where all of the Members (owners) have the ability to bind the LLC into contracts and agreements, as well as take part in the day-to-day operations and business decisions.

What is a Manager-Managed LLC?

A Manager-Managed LLC is where the LLC Members appoint one or more Managers, who are then the only one(s) that have the ability to bind the LLC into contracts and agreements and take part in the day-to-day operations and business decisions.

An LLC Manager can be an existing Member (ex: 2 of 4 Members are Managers, and the other 2 Members are passive owners) or an LLC can have an “outside Manager” (ex: all the Members hire someone who does not own any of the LLC, but is simply hired to run the business).

The above was the “quick answer” to the differences between a Member-Managed LLC and a Manager-Managed LLC. For those of you who are still getting familiar with LLCs, we’re going to dive into things in a bit more details…

In most states, your LLC’s type of management must be listed in your Articles of Organization (sometimes called Certificate of Organization or Certificate of Formation).

Additionally, which type of management you choose for your LLC will dictate which type of Operating Agreement your LLC uses (a Member-Managed Operating Agreement or Manager-Managed Operating Agreement).

Before going further, let’s cover some basic LLC vocabulary.

LLC Members:

An LLC Member is an owner of the LLC. An LLC Member can own 5%, 100%, or any percentage for that matter. All states allow for Single-Member LLCs, where there is just 1 Member, or an LLC can have multiple members, called a Multi-Member LLC. There is no limit* to the number of Members an LLC can have.

*If an LLC elects to be taxed as an S-Corp with the IRS, there is a limit to the number of shareholders (owners) the LLC can have. The limit is 100 shareholders (source).

Management:

In the context of LLCs, the term “Management” can mean many things (depending on how the Operating Agreement is drafted), but in general, it means the ability to bind the LLC into contracts and agreements, participate in the business decisions and take part in day-to-day activities.

Additionally, the person (or persons) managing the LLC also have the ability to:

• make all legal and financial decisions
• open and close bank accounts
• enter into any and all contracts and agreements
• buy/sell real estate, vehicles, investments, and other financial instruments
• dispose/divest of the LLC’s assets
• borrow money and obtain financing
• hire employees, staff, and independent contractors

Whoever is managing the LLC has a fiduciary duty (a legal obligation) to act in the best interest of the LLC.

Now that we understand what LLC Members are and what LLC management is, let’s discuss the 3 different types of LLC management:

1. Member-Managed LLC:

A Member-Managed LLC is when all of the LLC owners (again, called Members) have a right to bind the LLC into agreements and they regularly make business decisions and run the “day to day” activities.

The keyword in Member-Managed LLCs is all, meaning that all of the LLC Members have the ability to bind the LLC.

If some of the Members don’t want to partake in the day-to-day activities, they can appoint a Manager or Managers. These Manager(s) can be existing LLC Members, or they can be non-Members, which we discuss below.

2. Internal Manager-Managed LLC:

An Internal Manager-Manager LLC is when some of the Members do not want to run the business and make decisions, and instead want the other Members to take care of this.

Let’s take an example of a 4 member LLC for the purpose of real estate investing. If 2 Members (Steve and Susie) are responsible for the funding and don’t want to run the business, all the Members can agree to appoint the other 2 Members (Bob and Barbie) as the Managers. We call this an “Internal” Manager-Managed LLC, since the Managers, Bob and Barbie are also Members of the LLC.

3. External Manager-Managed LLC:

An External Manager-Managed LLC is very similar to an Internal Manager-Managed LLC, except this time, none of the Members are the Managers, and instead, all of the Members take a “back seat” and they hire an outside person or persons (who is not an owner of the LLC) to run the company.

And I guess there is also a 4th “unofficial” type of management, but we didn’t want to make things too confusing. It’s simply an LLC that has both internal and external Managers. For example, a 5 Member LLC where 3 Members are “passive Members”, but the other 2 are Managers, in addition to one other person they hired as Manager, who is a non-Member.

*Note: If an LLC is formed with no Operating Agreement, and where no decision is made as to how the LLC will be managed, then state law comes into play; which states that the LLC will be Member-Managed.

How are 1-Member LLCs (Single-Member LLCs) Managed?

Most LLCs that have 1 Member elect to be a Member-Managed LLC, but a Single-Member LLC can also be Manager-Managed.

This may make you scratch your head a bit. In short, the Member can choose to manage the LLC him/herself, or the Member can elect a Manager (also being him/herself) to manage the LLC.

The pros of this setup is that in some states, where you are required to publicly state (via your LLC’s Articles of Organization) who the Members or Manager are, listing yourself as “Manager” does not automatically let the public know that you own the LLC. If instead you were to list “Member”, this clearly states that you are the owner of the LLC.

Most LLCs are Member-Managed

The majority of our readers are forming LLCs with 1 to 3 Members, and most of them choose to have their LLCs be Member-Managed. This is the simplest and easier route to choose.

Binding Contracts in a Manager-Managed LLC

It’s important to note that in a Manager-Managed LLC, it’s only the Managers that can enter into and bind the LLC to a contract.

The Members (that are not Managers) cannot bind the LLC to contracts or agreements and they cannot take part in the day-to-day operations (typically, unless they get authorization in writing from the Managers).

An LLC Member can advise an LLC Manager, but an LLC Manager does not have to follow or agree to this advice.

Having said that, Members still have power, since if all Members agree, the Members can remove the existing Managers and appoint a new one. All Members must agree to such changes in writing.

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Matt Horwitz
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42 Comments

  1. john newell October 11, 2017

    In our Tour by vehicle LLC, two owners and founders are managers. The LLC wants to have additional tour drivers who are members compensated on a per tour basis.

    How do we designate the drivers as members / owners?

    reply
    • Matt Horwitz October 18, 2017

      Hi John, are you sure you want the drivers as members (owners) of the LLC? You can pay people on a per tour basis without adding them as owners in your LLC.

      reply
  2. Pam Lefferts December 21, 2017

    I have submitted an application for LLC. I am operating a wildlife rescue and want to become non-profit. Is this the first step in that process? Do I ave to pay an annual fee to keep the LLC for our name?

    reply
    • Matt Horwitz December 22, 2017

      Hi Pam, LLCs are not non-profit vehicles. A non-profit is actually a non-profit Corporation. Said another way, you’d first form a Corporation with the state and then file an application with the IRS to get an exempt/non-profit status. Whether or not your LLC has an Annual Report depends on the state. Where did you form the LLC?

      reply
  3. Nadiya January 2, 2018

    Hi Matt,

    My business partner and I will be establishing a Multi member LLC in PA. Currently we are still searching for a suitable Tax Professional here in Phila-Pa. We each operate the business from home (two separate addresses). Are we able to list two different addresses when establishing an LLC for tax purposes???

    reply
    • Matt Horwitz January 2, 2018

      Hey Nadiya, on the Pennsylvania Certificate of Organization, there are two address fields. The first is the Registered Office address. The second is the LLC Organizer address. There isn’t a way to use two addresses for the Registered Office, so you’ll need to choose one address to put there. If you’d like to list both you and your partner (and both of your addresses) in the Organizers section, you can do that. Hopefully that helps. Let me know if you have any followup questions.

      reply
  4. Barbara January 2, 2018

    Hello,
    I want to open a personal care agency by myself in the State of Indiana. I am still confused on if I should select a manager- managed or member- managed. Since I will be the only one making decisions. Is it very difficult to do manager- managed articles?

    reply
    • Matt Horwitz January 2, 2018

      Hi Barbara, you can really pick either one. There are not really pros and cons in the single-member Indiana LLC to going one way over the other. I’d say if you’re looking for something simple, go with Member-managed. On the other hand, if you decide to go with Manager-managed, let me know and I’ll email you our Manager-managed Operating Agreement (we don’t have it on the website yet). Hope that helps!

      reply
  5. Aleks Holiday January 10, 2018

    Our Grown college age children will be members on our LLC, however at this time we want a manager-managed LLC, can you email the template to me. I read in one of your other comments that it was different

    reply
    • Matt Horwitz January 15, 2018

      Hi Aleks, sure thing! I just emailed it to you.

      reply
      • James January 16, 2018

        I’m in the process of forming my LLC. I plan to add myself and my three kids as members. Kids are 18, 16 and 14. Because of my kids, I plan to make my LLC a Manager Managed structure in which I intend to be the manager and make my kids passive members. My LLC is being formed for my Real Estate Business, as I’m a Real Estate Broker in the state of WA. I also intend to elect to be taxed as an S-Corp due to the amount of money I predict to make. Is there any pointers you can give me or do you think my plan is ok?

        reply
        • Matt Horwitz January 17, 2018

          Hi James, Manager-managed (with you as Manager) sounds like an excellent setup. We have a guide on LLCs being taxed as S-Corps here: LLC Taxed as an S-Corp (Form 2553). I recommend speaking with an accountant (or a few) to make sure it’s the best tax setup for you. Hope that helps!

          reply
  6. Julio Cintron January 11, 2018

    Hi ,
    My wife & setting up a cleaning business. My wife & I will manage all business operations & will hire employees to handle the labor (cleaning) part. If I’m right, is “members managed” the best way to go in my case? With the members being just me & my wife?

    reply
    • Matt Horwitz January 15, 2018

      Hi Julio, yes, correct. A Member-managed LLC with you and your wife is the way to go. Hope that helps!

      reply
  7. Patricia Meeks January 13, 2018

    My deceased mother & her disabled sister have an llc. I am the executor of my mothers will & my aunt also signed over 50 to me. Can I form an llc for just my mother & let my aunt’s kids have hers seperately

    reply
    • Matt Horwitz January 15, 2018

      Hi Patricia, I’m not sure in this case. Apologies I couldn’t be more helpful. I recommend calling a few lawyers and seeing what they think.

      reply
  8. James January 16, 2018

    Could you also forward me a copy of your Manager Managed Operating Agreement Template?

    reply
    • Matt Horwitz January 16, 2018

      Sure thing. Just emailed it to you√

      reply
      • Gary January 30, 2018

        Hello Matt,
        First of all, thank you for your Q&A, pretty helpful.

        My wife and I are starting a Arkansas LLC for a couple of rental properties, very simple. It’s just her and I and no one else will be “members.”
        1)Will this be a member managed or manager managed setup?
        2)I have no clue as to what to say on the operating statement. Any ideas will be a huge help!!

        Thank you!!!

        reply
        • Matt Horwitz January 31, 2018

          Hey Gary, you’re very welcome :) 1. Easiest to do Member-managed. 2. You can download a “fill in the blank” Operating Agreement here: Arkansas Operating Agreement. There are instructions on that page which should help.

          reply
  9. Del January 17, 2018

    I enjoy your wisdom Matt. I’m a General Contractor in Michigan who is looking into creating multiple LLC’s to eliminate or reduce certain taxes and insurance obligations by way of “spreading the wealth” with each individual member of our various crews. For instance, a manager managed, five man drywall crew, all members, are compensated on a percentage basis determined by the role they play. If the facts were laid out in writing beforehand, would this be legit? Could I look at your member managed operating template?

    reply
    • Del January 17, 2018

      Whoops, I meant manager managed operating agreement template, sorry.

      reply
      • Matt Horwitz January 19, 2018

        Hi Del, thanks for the kind words. Honestly, in this situation, I’m really not sure. First time hearing of something like this. I recommend giving our “knights of the roundtable” strategy a go and phoning a few attorneys and/or accountants. I just emailed you the Manager-managed Operating Agreement.

        reply
        • Del February 1, 2018

          Hey Matt, I want to say thank you for the response and I appreciate you offering your expertise to those of us who are always seeking ways to better ourselves. Much gratitude.

          Upon further analysis it looks as tho a Member Managed llc could be the wiser choice for my endeavor due to certain limitations within this myriad of potential mayhem. Do you think I could bother you for an member managed operating agreement template to look over?

          reply
          • Matt Horwitz February 3, 2018

            Hi Del, thank you for the nice comment. You are very welcome :) Sure thing. You can find that here.

            reply
  10. Jay February 6, 2018

    I am forming an LLC for a rental business and am not sure about member managed vs manager managed for tax reasons. Are they both treated as pass through taxation?

    reply
    • Matt Horwitz February 9, 2018

      Yes, they are both treated the same for pass through taxation. This might be a helpful example… pretend you have a Manager-managed LLC with 3 people. You and a business partner are Members and you hire a 3rd person, pay them a salary, and they are your Manager (and not a Member). The Manager will just pay taxes as normal (whether an employee or independent contractor). You and your partner still have to file a 1065 Partnership Return, issue K-1s, and report the income on your personal 1040s. On the other hand, if you and your business partner (this time no 3rd person) formed a Member-managed LLC, you’d still file taxes the exact same way. Hope that helps Jay.

      reply
  11. Scott February 16, 2018

    Hello,

    I will probably be starting a manager managed LLC in Indiana with me as the manager. It will be just me. I am starting a few online e-commerce businesses. I am looking for the easiest option that provides the best liability protection as well as good tax benefits. Any suggestions?

    Thanks,

    Scott

    reply
    • Matt Horwitz February 21, 2018

      Hey Scott, Member-managed vs. Manager-managed shouldn’t affect liability or tax benefits (in simple terms). If you really wanted to dig into the details, you’d have to get on the phone with a few attorneys. There may not be much of a benefit of being a single-member LLC that is Manager-managed by you (being both the Manager and the sole Member). But on the other hand, many say it doesn’t matter much in a single-member LLC. Apologies for the vague answer, but hope it helps somewhat.

      reply
  12. William Kaelin February 17, 2018

    My friend and I are purchasing residential rentals in PA as investment for retirement. We have decided on forming an LLC. We live in different towns about an hour away. It will be a 50/50 partnership. He mentioned that it may be easier to have me as the Member Manager in our agreement so he doesn’t have to come out to sign forms, such as getting home insurance and whatever else comes up. Thoughts? Suggestions? And if I do become the Member Manager, will I incur any additional tax liability? No, I will not be taking any salary. Thank you in advance.

    reply
    • Matt Horwitz February 21, 2018

      Hi William, I believe you mean “Manager” or “Managing Member”. A “Member Manager” isn’t a term that is really used (as it’s ambiguous). For more details on titles, please see LLC Officer Titles. I think what your partner is suggesting though is for the LLC to be Manager-managed and you be the Manager. If that’s the case, no, this will not increase your tax liability. Hope that helps.

      reply
  13. Jordan March 15, 2018

    The only way to appoint a manager is to vote someone into that position, after the Operating Agreement is formed? Meaning that when the LLC is initially being formed, everyone is either a manager or a member.? (I’m from Texas)

    reply
    • Matt Horwitz March 22, 2018

      Hi Jordan, think of the vote (if Members are voting to elect a Manager or Managers) taking place by adopting and signing the Operating Agreement. But what’s entered in the Certificate of Formation should match what the vote becomes. I know that’s a bit confusing to read, but let me know if that helps.

      reply
  14. Kitty April 13, 2018

    Does the sole proprietor of a manager-managed LLC have to be the manager or can an outside person be chosen?
    Do you have a manager-managed operations agreement?

    reply
    • Matt Horwitz April 14, 2018

      Hey Kitty, a non-Member can be a Manager. I just emailed you a Manager-managed Operating Agreement. Hope that helps.

      reply
  15. Dave R. April 18, 2018

    Hi Matt! First, thank you for this website and the information that you provide. This has been my go-to source since I’ve discovered it in January 2018. It’s simple, straight-forward, and user-friendly. Second, I’d like to get a soft copy of the Manager-Managed Operating Agreement if you’re still sharing that. Thanks in advance.

    Best Regards,

    Dave R.

    reply
    • Matt Horwitz April 20, 2018

      Hey Dave, thanks for the awesome comment! So great to hear! Just sent you an email with the Manager-Managed Operating Agreement. Hope that helps and best wishes :)

      reply
  16. Julie May 3, 2018

    I have a current LLC but I want to open another LLC under it (basically the first one will be a holding company is my understanding) The originall LLC is a 2 member managing company. Will I continue a Member managed operating agreement for the company I am forming under it or does this now qualify as a Manager-Managed? I am assuming the former as the the orignial 2 members will still be managing both the holding company and this new company?

    reply
    • Julie May 3, 2018

      I think I may need a Manager-Managed Operating Agreement?

      reply
      • Matt Horwitz May 16, 2018

        Hi Julie, I just emailed it to you.

        reply
        • Matt Horwitz May 16, 2018

          Hi Julie, the email came back as “failed”. Please fill out the contact form on our website and I’ll send the Operating Agreement your way. Thanks.

          reply
    • Matt Horwitz May 16, 2018

      Hi Julie, you have the LLCs managed any way you want. There is no “forced option”. Hope that helps.

      reply

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