Member-Managed vs Manager-Managed LLC: What a Managing Member Is

The model act (the Revised Uniform Limited Liability Company Act, approved in 2006) defines a member-managed LLC as one that is not manager-managed. In its default rules for a member-managed LLC, management and conduct of the company are vested in the members, each member has equal rights in management, and a disagreement over an ordinary matter may be decided by a majority of the members.

In a manager-managed LLC, the model act's default rules give decisions about the company's activities to the managers. A manager is a person who, under the operating agreement, is responsible for performing those management functions, and a person need not be a member to be a manager. Members who are not managers do not run the business, though some decisions outside the ordinary course still need member consent under the act's defaults.

These are default rules, and the model act lets the operating agreement change most of them. Your state's statute may set different defaults, and your own agreement controls where the statute allows it.

“Managing member” is not a term the model act defines. In practice an operating agreement uses it for a member who is given the authority to manage the LLC, often in an LLC where other members are investors. The label matters less than what the agreement and your state's statute say that person may do. If you expect to name a managing member, the operating agreement is where to state what that member may decide alone, what needs other members' consent, and how the role ends.

The model act says a member is not an agent of the LLC solely because the person is a member. The act's comments explain why: most LLC statutes at the time gave members of a member-managed LLC and managers of a manager-managed LLC “statutory apparent authority” to act for the company, and the model act chose a different approach. Whether a member or manager can bind your LLC to a contract therefore depends on your state's statute, on the operating agreement, and on ordinary agency law. Do not assume that a title alone settles it, and have a lawyer read your agreement before you rely on it.

On duties, the model act makes the members of a member-managed LLC, and the managers of a manager-managed LLC, owe the company fiduciary duties of loyalty and care, which it states in general terms (for example, to account for profits from company property and to refrain from competing with the company). In a manager-managed LLC, a member who is not a manager has no fiduciary duty to the company or other members solely by being a member. The operating agreement can adjust these duties only within limits the statute sets, so this is a general picture and not advice on any particular agreement.

• Member-managed often suits an LLC whose owners all work in the business, such as a single-member LLC or a small group of active partners, because decisions stay with the people doing the work.
• Manager-managed often suits an LLC with passive investors who do not want a say in daily decisions, an LLC that hires an outside manager, or one with many members, where having every member run the business would be unwieldy.

Neither choice is better in the abstract. It changes who holds authority and who owes duties, so decide it with your co-owners and put it in writing.

Under the model act the choice is made in the operating agreement: an LLC is member-managed unless the agreement expressly provides that the company is “manager-managed,” “managed by managers,” or that management is “vested in managers,” or uses words of similar import. State statutes differ on the default and on wording, and some states also ask for the structure on the formation filing.

Whether your state's formation form asks is something we record state by state from each state's own form and statute. Pick your state in our Articles of Organization guides to see what your state's form asks. Where the state does not ask, the operating agreement is still where the structure should be written down.

The IRS says an LLC's federal tax classification depends on elections made by the LLC and the number of members. A domestic LLC with at least two members is classified as a partnership, and an LLC with one member is treated as an entity disregarded as separate from its owner, unless the LLC elects a different classification (the IRS page describes Form 8832 for that election). The IRS page does not list member-managed or manager-managed as a factor. How a particular member's share of income is taxed can depend on that member's role and facts, which is a question for a tax professional. See our LLC tax guide for the general picture.

Start with your operating agreement, because it says how it can be amended and who must approve. Under the model act's default rules, amending the operating agreement takes the consent of all members in a member-managed LLC, and in a manager-managed LLC as well. If your state filing names the structure, a change may mean filing an amendment with the state. Our guide to amending your LLC covers the steps, and adding or removing a member covers the wider checklist when the people involved change. Update your bank and any records that list who may sign for the LLC.