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Member Managed vs Manager Managed LLC: What’s the Difference?

Member managed vs manager managed LLCIf you plan to set up a limited liability company (LLC) in Florida, one of the first things you will be confronted with is the member-managed vs manager-managed LLC dilemma. 

Both management structures have their pros and cons, and which one would make a better fit for you depends on the size and nature of your organization and your long-term business goals.

The tricky part is that you must decide whether your LLC will be manager-managed or member-managed at the outset and specify your choice in the certificate of formation, the operating agreement, and, in some cases, the articles of organization.

If you fail to do that, Florida state law will assume your LLC is member-managed by default, and the relevant rules and tax implications will apply.

So, should you go for an LLC managed by members or managers? Keep reading to find out!

What Is the Difference Between a Member-Managed and a Manager-Managed LLC in Florida?

The difference between member-managed and manager-managed LLCs is that in the former, all members can bind the LLC to contracts and participate in the day-to-day operations and decision-making. While in a manager-managed LLC, these powers are reserved exclusively for an elected manager or managers.

What Is a Member-Managed LLC?

When forming an LLC, its owners – also known as members – must choose how the company will be managed. 

If the owners decide that all of them will be involved in the decision-making process and day-to-day running of the company, this management structure is known as a member-managed LLC.

In a member-managed LLC, all members have the authority to make business decisions, act as agents of the company, and bind the LLC to contracts. However, important decisions such as entering into loan agreements, liquidating the company, or mergers and acquisitions typically require majority approval.

Alternatively, the members of a member-managed LLC may appoint one or several managing members. In such cases, only the managing members can enter into binding contracts and otherwise run and act on behalf of the company.

As we will see below, it is not always clear how the authority of a managing member differs from that of a manager. The managing member vs manager ambiguity can create problems when dealing with third parties, so if you want a designated person running the company, you are likely better off with a manager-managed LLC instead.

Note that under the Florida Revised Limited Liability Company Act, all Florida LLCs are considered member-managed unless a Florida LLC operating agreement or articles of organization specify otherwise. If you want to appoint a managing member or a manager, you should state so explicitly.

What Is a Manager-Managed LLC?

In a manager-managed company, the management of the LLC is vested in one or several managers appointed by the members. 

The members may elect managers from amongst themselves or hire professional managers externally. A manager can be an individual or another business entity like a corporation or an LLC.

In either case, the authority to enter into binding contracts, make business decisions, act on behalf of the company, and run the LLC on a day-to-day basis rests exclusively with the manager or managers. 

Non-managing members cannot generally bind the company unless they have written authorization from a manager. Members may still counsel the manager, but the manager is not required to follow their advice.

Florida LLC Member vs Manager

Before getting into an in-depth comparison of manager vs member-managed LLCs, let us take a closer look at the difference between members and managers.

LLC Member 

The members of an LLC are the owners of the LLC. There is no minimum ownership requirement – a member can own anything between 1 to 100% of the company. Depending on its size, an LLC can have one or multiple members. 

Every member makes a capital contribution to the company. The contribution may be monetary or in the form of services or physical assets such as equipment or office space. This affords each member a stake or interest in the company, including voting rights, a share in the profits and losses, and other rights as defined in the operating agreement.

LLC Manager

An LLC manager is an individual, a group of individuals, or a legal entity such as a corporation or an LLC appointed by the LLC members to run the company's daily operations.

The managers of an LLC may be members of the LLC themselves or third parties. Non-member professional managers are considered employees.

Manager vs Member LLC Comparison

In this section, we will break down and compare three key aspects of member vs manager-managed LLCs.

LLC Member-Managed vs Manager-Managed Tax Implications

Multi-Member LLCs

One of the main advantages of multi-member LLCs is that they are treated as partnerships for income tax purposes at both the federal and state level. 

This means that the company does not pay taxes itself. Instead, the profits are allocated among the business owners and recorded on their personal income taxes as provided by the operating agreement:

  • In member-managed LLCs, all members pay the self-employment tax rate of 15.3%.

  • In manager-managed LLCs, non-managing members do not pay the self-employment tax rate, but other taxes may apply depending on the business structure.

Keep in mind that this is the default position for multi-member LLCs. If you do not want to be taxed as a partnership, you can elect to be treated as an S-corporation.

Single-Member LLCs

Single-member LLCs are taxed as sole proprietorships by default. Alternatively, you can elect to be taxed as an S-corporation.

Manager-Managed vs Member-Managed Fiduciary Duties

Managers of manager-managed LLCs and members of member-managed LLCs owe LLC fiduciary duties of care and loyalty to the company and its members. This includes:

  • Accounting to the LLC

  • Hosting as trustee any property, profit, or benefit derived from the manager or member

  • Refraining from dealing with the LLC as a person with an adverse interest to it

  • Refraining from competing with the LLC

  • Acting consistently with the principles of good faith and fair dealing

  • Refraining from negligent or reckless conduct, willful misconduct, and knowingly violating the law

  • Considering the long-term interests of the LLC and the impact of company actions on employees, customers, and the wider community

Managers and members that do not meet their obligations may be liable for breach of fiduciary duty damages.

Member-Managed LLC vs Manager-Managed LLC Statutory Rights

LLC ownership involves two statutory rights:

  • Management rights: The ability to contribute to LLC management by voting, exercising fiduciary and management responsibilities, attending member meetings, and accessing information about the LLC.

  • Economic rights: The ability to gain economic benefits, including a right to profit distributions.

These rights may be combined or separate as shown in the table below:

RightsMember-Managed LLCMember-Managed LLC with Managing Member(s)Manager-Managed LLC
Economic RightsAll membersNon-managing membersAll members
Management RightsAll membersManaging membersManager(s)

Manager-Managed LLC vs Member-Managed LLC Compensation

LLC members are not considered employees and do not normally receive compensation for their services to the company. 

However, an LLC member that performs management functions – such as a managing member or manager – may receive employee compensation. In such cases, the member’s employment income is distinct from their owner status and should be stipulated in either the operating agreement or a separate employment agreement.

Non-member professional managers in manager-managed LLCs are considered employees. As such, they are entitled to compensation.

Recap of Member-Managed vs Manager-Managed LLC: Pros & Cons

Consult the tables below for a handy breakdown of the difference between manager-managed and member-managed LLCs.

LLC Member-Managed

ProsCons
1. Less complicated structure
2. All members have a say
3. Good choice for small businesses such as retailers and brick-and-mortar businesses
1. Daily management can take owners' time and attention away from strategic matters
2. More difficult to raise capital from investors
3. More difficult to make quick decisions when consensus is required

LLC manager managed

ProsCons
1. Easier to make quick decisions and operate quickly
2. Suitable for large LLCs or LLCs with passive investors
3. Good choice for family-owned businesses with children incorporated as members
1. Not all owners have a say in management decisions
2. The operating agreement must carefully outline the manager's authority
3. Paying compensation to professional managers may be hard on smaller businesses

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

The choice between a member vs manager-managed LLC depends on numerous factors, including:

  • The number of owners

  • The size and complexity of the company

  • Whether there are silent partners that will not be involved in the day-to-day operations of the business

  • The type of business

  • Whether you need to be able to make quick decisions

  • How much liability protection members require

You should also keep in mind that the member vs manager-managed dichotomy is deceptively simplistic. In reality, incorporators have to make much more complicated decisions about the management structure of their LLCs that often require specialist legal advice.  

For instance, you may need to create different voting rights so that some owners have more say than others. This can be done by requiring supermajority or unanimous voting for certain business decisions or establishing voting and non-voting interests.

Alternatively, you may need to limit manager authority by requiring member approval for specific actions, such as mergers and acquisitions or liquidation of the LLC.

Need Help Choosing Between a Manager-Managed or Member-Managed LLC?

Our specialist business attorneys can advise you on the best management structure for your company and draft an operating agreement that will protect your interests and shield you from liability.

Contact the Cueto Law Group to put an end to the member-managed versus manager-managed LLC dilemma for good.

FAQs

Can I Change My LLC from Member-Managed to Manager-Managed?

Members may appoint managers at any time, whether the company is member- or manager-managed, by amending the articles of organization. In most cases, this will require a vote, and state law may require a unanimous decision. An additional provision to the same effect can be inserted in the operating agreement.

Can I Change My LLC from Manager-Managed to Member-Managed?

Yes, you can change the management structure of your LLC from manager- to member-managed by amending the articles of organization and following any relevant rules in the operating agreement. This usually requires a member vote. Depending on where you are based, state law may also require a unanimous decision.

Can a Manager of an LLC Not Be a Member?

When appointing managers for an LLC, members may either elect managers from amongst themselves or hire non-member professional managers externally. Managers can be private individuals or business entities such as corporations and LLCs. Professional managers are considered employees and are entitled to compensation for their services.

How Many Managers Can an LLC Have?

There is no restriction on the number of managers an LLC can have. The only exception is single-member LLCs, which can only have one managing member but multiple professional managers. In contrast, multi-member LLCs may have as many managing members and non-member professional managers as desired.

Can All Members of an LLC Be Managers?

Yes. In a member-managed LLC, all members have management authority. In cases where not all members wish to exercise management functions, they can either elect one or several managing members or change the company’s management structure to a manager-managed LLC and appoint a professional manager.

Is a Manager of an LLC an Employee?

Non-member managers in manager-managed LLCs are employees and receive compensation for their services. LLC members performing management functions – managing members in member-managed LLCs or managers in manager-managed LLCs – may also receive compensation. This is separate from their owner income and must be stipulated in the operating or an employment agreement.

Can an LLC Manage Another LLC?

Yes. An LLC can be managed by one or several individuals – including managing members or non-member managers – or legal entities such as corporations and other LLCs. The choice of managers is up to the members but must be set out in writing in the operating agreement.