What Is a Member-Managed LLC?
In a member-managed LLC, all members (i.e., owners) share responsibility for running the business. Each member has authority to act on behalf of the LLC, enter into contracts, manage finances, and oversee operations. This structure reflects the default model in most states unless otherwise specified in the LLC’s operating agreement or Articles of Organization.
When to Choose Member-Managed
- All members want and are able to actively participate in business operations.
- The business is relatively small or simple.
- There is a high level of trust and alignment among the members.
For instance, two business partners launching a boutique marketing firm together and intending to co-manage the business would likely benefit from a member-managed structure.
What Is a Manager-Managed LLC?
In contrast, a manager-managed LLC allows the members to appoint one or more individuals (either members or non-members) to manage the business. The managers are responsible for operations, while non-managing members take on a more passive, investor-like role.
When to Choose Manager-Managed
- Some members want to invest but not participate in daily decision-making.
- The business is large, complex, or requires specialized expertise to run.
- There is a clear separation between ownership and management (e.g., similar to how shareholders and executives function in a corporation).
For instance, in a restaurant LLC with three investors but only one partner experienced in hospitality management, the operating agreement may appoint that partner as the sole manager, insulating the others from day-to-day involvement.
Key Differences at a Glance
| Feature | Member-Managed LLC | Manager-Managed LLC |
|---|---|---|
| Control & Operations | All members manage directly | Designated manager(s) manage |
| Member Involvement | Active participation | Passive unless appointed as manager |
| Binding Authority | Any member can bind the LLC | Only designated manager(s) |
| Suitable For | Small, owner-operated businesses | Larger or investor-driven businesses |
Fiduciary Duties: Who Owes What?
One of the most critical aspects of LLC management is the concept of fiduciary duties—the legal obligations owed by someone in a position of trust to act in the best interest of the company and its members. Regardless of whether an LLC is member- or manager-managed, those in control owe fiduciary duties to the company and its members. Fiduciary duties include:
- Duty of Loyalty: Avoid self-dealing, conflicts of interest, and competing with the LLC. A fiduciary must place the LLC’s interests above their own in relevant matters.
- Duty of Care: Make informed, prudent decisions, acting with reasonable diligence and attention. Careless or grossly negligent actions may be considered breaches of this duty.
- Duty of Good Faith and Fair Dealing: Act honestly, fairly, and in accordance with the operating agreement and the expectations of the members.
What If a Member Is Also a Manager?
In manager-managed LLCs, it is common for one or more members to also serve as managers. This dual role brings clarity and complexity: such members will have fiduciary duties both as owners and as managers.
A member-manager must:
- Act in the best interests of the LLC, even if doing so might not align with their personal preferences or interests as a member.
- Disclose any conflicts of interest and abstain from decisions where they stand to personally benefit at the LLC’s expense.
- Avoid using LLC assets, opportunities, or information for personal gain without member approval.
This dual role can be beneficial because it aligns ownership with oversight—but it can also create tension. For example, if a member-manager proposes to lease space owned by their own separate real estate company to the LLC, they must disclose the relationship and potentially obtain consent from the non-managing members.
Putting It All in Writing: The Operating Agreement
Whether you choose a member- or manager-managed structure, it is crucial to outline the specifics in the LLC’s operating agreement. This document should state:
- Whether the LLC is member- or manager-managed.
- The powers and duties of managers and members.
- Procedures for resolving disputes and removing managers.
An effective operating agreement not only ensures legal compliance but also reduces the risk of internal disputes by aligning expectations early on.
Final Thoughts
Choosing between a member-managed and manager-managed LLC comes down to how you want your business to be run and who you want making decisions. While a member-managed LLC gives all owners a direct say, a manager-managed structure offers flexibility, particularly when some owners prefer to remain hands-off. Understanding and respecting fiduciary duties—especially when members also act as managers—is essential to maintaining trust and avoiding legal pitfalls. Be sure to reflect these responsibilities clearly in your LLC’s governing documents, and revisit them as your business evolves.
Have questions about which LLC structure is best for you? Reach out to our firm today. We are here to help you choose the right path and draft the documents to protect your business from day one.
Contact Person: Nick L. Torres, Esq. and Zhiqi Zheng, Esq.
