Manager-Managed LLCs: The Details

Considering manager-management for your LLC? Here's what you need to know.



A limited liability company (LLC) can appoint a manager or small group of managers to manage the business (somewhat like a board of directors oversees a corporation). Manager-management can make sense if some LLC members (such as outside investors or family members) won't take part in decision making. However, LLC managers need not be members; it's unusual for a small LLC, but an outsider may be hired to act as third-party manager.

Let's look at some more aspects of manager-managed LLCs.

Authority

In a manager-managed LLC, only managers are authorized to make LLC management decisions, enter into deals, and bind the LLC to contracts. The non-managing members don't have a say in the management of the business, but they are entitled to a share of LLC profits. Depending on what the operating agreement says, either the managers or the members can decide when distributions will be made to members.

Outside Investors

If you want to give an outsider (for example, someone who is loaning money to the business) a say in management, but not a membership in the LLC, you can choose manager-management and appoint that person to be manager along with all or some members.

LLC Operating Agreement

A manager-managed LLC needs to have an operating agreement that has been customized for manager-managed LLCs. The operating agreement should provide that management decisions will be made by the managers and should specify the vote required to make management decisions (such as a majority of managers or a unanimous vote of all managers). The operating agreement should also include provisions for removing managers and appointing new managers, as well as rules for meeting informally and formally, in which case quorum requirements should be included. Finally, a manager-managed operating agreement should state that managers are not liable for the debts or liabilities of the business – assuming you want to extend the LLC's limited liability to the managers – and an indemnification provision, which is an agreement by the LLC to pay for debts that a manager incurs on behalf of the LLC, perhaps including attorney's fees.

Self-Employment Taxes

Nonmanaging members in a manager-managed LLC may not have to pay self-employment taxes, if they are not active in the business. If you are in this situation, consult a tax adviser.

Securities Registration and Exemptions

If you'll be the sole owner of your LLC and you don't plan to take investments from outsiders, your ownership interest in the LLC will not be considered a "security" and you don't have to concern yourself with these laws.

On the other hand, if you choose manager-management for your LLC, and you have multiple members, you may need to comply with federal and state securities procedures when setting up your LLC. Membership interests in a manager-managed LLC might be classified as securities because nonmanaging members may be investing their money in a business in which they are not actively participating.

If your LLC's membership interests are considered securities, you must get an exemption from state and federal securities laws before the initial owners of your LLC invest their money. Fortunately, smaller LLCs usually qualify for securities law exemptions. For example, SEC rules exempt the private sale of securities from registration if all owners reside in one state and all sales are made within the state; this is called the "intrastate offering" exemption.

Another federal exemption covers "private offerings." A private offering is an unadvertised sale that is limited to a small number of people (35 or fewer) or to those who, because of their net worth or income earning capacity, can reasonably be expected to be able to take care of themselves in the investment process. Most states have enacted their own versions of these popular federal exemptions.

If you don't qualify for an exemption to the securities laws, you must register the sale of your LLC's ownership interests with the SEC and your state.

Single Member LLCs

Single member LLCs (including spousal single member LLCs in states that have community property laws) should generally set up manager-management, appointing the member as the manager. While, in practical terms, there's not much difference between member-management and manager-management for a single member LLC (SMLLC), having a formal manager role set up makes it easy to arrange for a successor manager to take over if the member should become incapacitated or die. The successor manager needs to be named in your single-member LLC operating agreement.

Choosing Manager-Management for Your LLC

For help deciding whether to choose member-management or manager-management for your LLC, see Nolo's article on member-managed LLCs vs manager-managed LLCs.

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