Last updated October 12, 2020

Deal alert! Our favorite company, Northwest, is forming LLCs for $39 (60% off!) See details.

Difference between Member-Managed and Manager-Managed LLC

Member-managed vs Manager-managed LLC

When forming an LLC, you must decide whether it will be Member-managed or Manager-managed. Another way to describe this is that you need to decide how your LLC will be managed.

An LLC can either be managed by its Members (a Member-managed LLC) or by its Managers (a Manager-managed LLC).

What is a Member-managed LLC?

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

Most small businesses choose for their LLC to be Member-managed.

What is a Manager-managed LLC?

A Manager-managed LLC is when one, or a few designated people (called Managers), have the ability to bind the LLC in contracts and agreements, as well as run the business and day-to-day operations.

Typically, the owners (Members) cannot bind the LLC in contracts and agreements, and they can’t take part in running the business and day-to-day operations.

While the Members initially vote-in the Manager(s) (and can remove them), after that, the Members take a passive role and let the Manager(s) run the business.

However, in a Manager-Manager LLC, some of the LLC Members can also be Managers. We’ll discuss this in a few paragraphs.

Depending on the state where you form your LLC, your LLC’s management structure may be listed in your LLC formation documents (Articles of Organization, Certificate of Organization or Certificate of Formation). However, many states don’t ask and just let you decide “internally”, as spelled out in your LLC’s Operating Agreement.

We have Operating Agreement templates you can download below. We have a Member-managed Operating Agreement and a Manager-managed Operating Agreement.

Member-managed LLC by default

If an LLC is formed in a state where management isn’t listed on the LLC formation documents, and the Members haven’t signed an Operating Agreement, then state statute will apply. In this case, states default to an LLC being Member-managed.

Need to save time? Hire a company to form your LLC:
Northwest ($39 + state fee) or LegalZoom ($149 + state fee)

What is an LLC Member?

Simply put, an LLC Member is an owner of the LLC.

An LLC Member can own 5%, 20% 100%, or any percentage, of the LLC.

All states allow for Single-Member LLCs (1 owner) and Multi-Member LLCs (2 or more owners). 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).

What is an LLC Manager?

An LLC Manager is not the same thing as a “general manager” or “manager” (i.e. a store manager).

The term LLC Manager is something specific that is governed by a state’s LLC laws.

An LLC Manager is elected by the LLC Member(s) to bind the LLC in contracts and agreements and run the day-to-day operations.

LLC Management

When a person “manages” an LLC, it means the person has the legal authority to bind the LLC in contracts in agreements as well as run the operations.

Here are some examples of the type of authority someone who manages an LLC has:

  • make legal decisions
  • make financial decisions
  • open an LLC bank account
  • enter into 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
  • and more

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

Member-Managed LLC

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

The key term 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 or bind the LLC in agreements, 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.

“Internal” Manager-managed LLC

Note: An Internal Manager-managed LLC is not an official term, however we use it to make LLC management easier to understand.

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

For example, let’s look at a four-Member LLC in the real estate business. Two Members, Steve and Susie are bringing the money, but they don’t want to run the day-to-day operations. Bob and Barbie, the other two Members, while bringing some money to the table, are responsible for finding properties and managing the renovations.

Steve, Susie, Bob, and Barbie are all Members, however Steve and Susie do not manage the LLC; Bob and Barbie do.

Therefore, this LLC is a Manager-managed LLC:

  • Steve and Susie are the Members
  • Bob and Barbie are the Managing Members (they are both Members and Managers)

“External” Manager-managed LLC

Note: An External Manager-managed LLC is not an official term, however we use it to make LLC management easier to understand.

An External Manager-managed LLC is very similar to an Internal Manager-managed LLC, except this time, none of the Members are the Managers. 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 LLC.

For example, Steve and Susie are both owners of an LLC, however, they live in Illinois and invest in real estate in California. They want to bring on an LLC Manager to run the operations in California. They hire Charlie, a real estate expert, as their LLC Manager. Charlie runs the day-to-day operations and binds the LLC in contracts and agreements.

Therefore, this LLC is a Manager-managed LLC:

  • Steve and Susie are the Members
  • Charlie is the Manager

“Hybrid” Manager-managed LLC

Note: A Hybrid Manager-managed LLC is not an official term, however we use it to make LLC management easier to understand.

A Hybrid Manager-managed LLC is an LLC that has both “internal” and “external” Managers.

For example, let’s look at our four-Member LLC again. We have Steve and Susie who are Members. And we have Bob and Barbie who are Managing Members (they are both Members and Managers). The four have decided to hire a real estate expert, Charlie, to help expand their business. Charlie, along with Bob and Barbie, will run the day-to-day operations and bind the LLC in contracts and agreements.

Therefore this LLC is a Manager-managed LLC:

  • Steve and Susie are the Members
  • Bod and Barbie are the Managing Members (they are both Members and Managers)
  • Charlie is just a Manager

How are Single-Member LLCs Managed?

Most Single-Member LLCs elect to be Member-managed, however a Single-Member LLC can also be Manager-managed.

Typically, it’s a little redundant, but if there is a choice on the state’s LLC formation documents, some people don’t want to reveal that they are the owner (Member), so they choose for their LLC to be Manager-managed and they list themselves as the Manager.

This way, it’s more ambiguous since an LLC Manager may or may not be a Member. In this case, they would still own and control the LLC, but that would be done privately through the LLC’s Operating Agreement (there are templates you can download below).

Most LLCs are Member-managed

Most people choose for their LLC to be Member-managed.

A Member-managed LLC is a simpler management structure and is usually easier for people to wrap their head around.

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 bind the LLC in contracts and agreements.

The Members (that are not Managers) cannot bind the LLC in contracts or agreements and they don’t take part in the day-to-day operations.

An LLC Member can advise an LLC Manager, but an LLC Manager does not have to follow or agree to this advice (depending on the language in the Operating Agreement).

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. Again, the details depend on the language in the Operating Agreement.

What if I want to have someone else sign for the LLC, but I don’t want them to be an LLC Manager?

An LLC can still have someone sign on behalf of the LLC and enter into agreements, but this person doesn’t need to be an LLC Member or Manager. This person is usually called an Authorized Party or Authorized Individual.

This authority can be given to someone using a Resolution or an Authorization Agreement.

Typically, an arrangement like this is more limiting and restricting than having an LLC Manager.

We don’t have a Resolution or Authorization Agreement you can download at this time, but we do recommend working with an attorney if that’s something you’re interested in.

Operating Agreement Downloads for Member-managed and Manager-managed LLCs

Member-managed LLC Operating Agreement

Our Member-managed LLC Operating Agreement template is available in 3 formats:

Manager-managed LLC Operating Agreement

If your LLC will be Manager-managed, you can download the Operating Agreement template below, courtesy of Northwest Registered Agent.

Their Manager-managed LLC Operating Agreement template is available in 2 formats:

Operating Agreements don’t need to be notarized

Both Member-managed LLC Operating Agreements and Manager-managed Operating Agreements don’t need to be notarized.

Once the Members and/or Managers sign the Operating Agreement, it’s a legally binding document.

What’s up with all these “M” terms!

We hope this article has helped you learn more about Member-managed LLCs and Manager-managed LLCs.

But c’mon, who thought of those names! They are so confusing and sound so similar.

It reminds me of hip adduction and abduction. Sure, the names make sense, but anyone reading adduction and abduction or Member-managed and Manager-managed has to focus 3x time harder just so their brain doesn’t swap the terms!

Overall, there are way too many “M” terms going on. LLC Members, LLC Managers, LLC Management, Member-managed LLC, and Manager-managed LLC. Yea, way to make us rip our hair out lol. Okay, rant over. We hope we’ve been helpful!

Matt Horwitz
Founder & Educator, LLC University®
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! LLC University® teaches people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your business journey.
×

Copyright protected

Warning: This site is copyright protected and we enforce our rights to the fullest extent of the law. It is illegal to reproduce, distribute, or create derivative works without our written consent.

This does not apply to personal, non-distributive use.