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Manager-managed vs. Member-managed LLCs: What’s the Difference?

Manager-managed vs. Member-managed LLCs: What’s the Difference? 

by Galia Aharoni Schmidt

There are two roles an owner of an LLC can play: Member and Manager. What are those roles, and what’s the difference? And how do you know the best way to set up your LLC?

“Member” is the legal name for the owner of an LLC in California. At a very minimum, the Member is responsible for capitalizing the LLC (putting enough money or other assets into the business to start it up successfully), adopting the company’s operating agreement, and generally making any other decisions that are outside the normal course of operating the business. This includes deciding who will be responsible for making those day-to-day decisions.

The “Manager” is the person who is responsible for running the normal operations of the business.

Most of the time, new and small businesses will be owned and managed by the same person. If all of the owners of your LLC are also participating in the day to day operations of the business, and all have the ability to do things like write checks and enter into contracts on behalf of the business, your LLC is “Member-Managed.”

However, if one or more of the LLC owners will not participate in the day-to-day operations, the Members elect one or more people to run the business as the Manager(s). The Manager can be, but doesn’t have to be, an owner. This is called a “Manager-Managed” LLC.

A Manager-Managed LLC can be a good option for companies who have an owner who wants to use the company as an investment, but doesn’t want to participate in actively running the business. For example, if you’re starting a business but need some extra start-up money, you could bring on a non-managing member instead of getting a loan. Let’s say your sister agrees to put in $10,000, and in return, you give her 10% of a membership interest in your LLC. She would have a right to a share of the company’s profits, a right to vote on certain issues, and a right to access certain information, such as certain financial records, about the company.

Important note: if your LLC is set up as Manager-Managed and one or more of your owners are not participating in the company’s daily operations, you may have to file extra paperwork. See our article, Are Your LLC Interests Actually Securities? for  more information.

Because California allows a lot of flexibility to LLCs, there are many variations you can build into your LLC regarding rights, obligations, voting power, and profit/loss share. This is one of the reasons LLCs are so great! 

Knowing whether your LLC should be set up as a Member-Managed or a Manager-Managed LLC can greatly affect the internal operations of your business. It also changes the content of the documents you file with the Secretary of State. The language of your operating agreement will also change a lot depending on which type of LLC you create. Therefore, it’s a very important decision to make, and it’s equally important to make sure your LLC documents match the type of LLC management you need.

If you need help figuring out whether your LLC should be Member- or Manager-Managed, need help creating your LLC documents, or want to make sure the documents you already created correctly match your LLC structure, ABL can help. Contact us!

Want to learn even more about California LLCs? Check out our videos and articles about them!

Thinking image courtesy of Pixabay on Pexels