An LLC is a legal type of business structure that is popular among many business owners. LLC members and managers have different rights and responsibilities. This article takes a look at the difference between the two positions.
Single vs Multi-Member LLCs
Before we jump into the differences between a member and a manager, lets take a look into the differences between a single and multi-member LLC. As the name suggests, a single-member LLC has only one member, and a multi-membered LLC has more than one member.
In a single-member LLC, the sole owner is responsible for all the decisions, and it is more of a sole proprietorship. IRS recognizes single-member LLC as a sole proprietorship or disregarded entity for tax purposes. The taxes of the owner-member are passed through to the owner’s income.
It’s a different story when it comes to multi-member LLCs. Since there are multiple members, the decisions of the LLC are made based on a majority vote (unless there is some other provision in the operating agreement).
If the members want, they can appoint managers and other employees in the LLC with mutual consent. Similarly, a multi-member LLC is also taxed either as an S-Corp or a C-Corp.
Differences Between Membership and Managers
LLC members are the owners of an LLC, while the LLC members hire managers to run the operations of an LLC. An LLC manager can be an active LLC member as well and can be more than one person. Furthermore, an LLC manager can also be another corporation or any entity that specializes in operations.
Unless members are managers, managers don’t have any capital interest in the LLC, while members have the capital contribution in an LLC. LLC members can have various sorts of capital contributions ranging from cash, assets, services, or any other kind of equipment to operate the LLC.
What Do Members and Managers Have In Common?
While members appoint managers, and they are initially specified in the operating agreement of the LLC, they could be replaced and changed with time, albeit a provision in the operating agreement that stops from that.
LLC members and managers have a shared responsibility of operating the LLC for the best of business interest and not for their gains. In this context, one of the most critical aspects to discuss is the fiduciary duty.
It is the duty of loyalty that dictates the members, managers, and all the employees of an LLC to work for the benefit of the LLC and not for their interests. There are times when personal interest can prevail over the company’s good, and a potential conflict of interest arises.
A prime example of it is when an LLC enters into a business transaction that benefits its manager in a certain way but is not in the interest of the LLC. Such trades are known as ‘self-dealing,’ and they are the epitome of conflict of interest.
While such deals are not legally prohibited, they must be predicated on the full disclosure by the manager to the members of an LLC. The fiduciary duty bounds LLC manager to act prudently and diligently when dealing with LLC affairs.
Operating Agreement Considerations
For fiduciary duty and all the other elements to run a successful LLC under a manager, there are specific points that you should always include in your operating agreement. Here, are some considerations to take into account:
> Settlement of Disagreements
Your operating agreement for an LLC should always define how you would settle the disagreements. While you may think that it could never happen, you will always have inevitable disputes if you have a multi-membered LLC. It is where the role of your operating agreement becomes very crucial.
Your operating agreement should define how you will settle your disagreements, and these disagreements could of various types. There could also be disagreements regarding the decision-making that also involve managers of the LLC. Once you have added the provisions in the operating agreement of your LLC, settlement of differences becomes easier.
> How To Change It
When you are drafting your operating agreement, one of the foremost things that you should consider is to include the provisions that define how you can change your operating agreement under various circumstances that could arise in the future.
For example, you have appointed a manager to run your LLC and have included him in the operating agreement, but now you want to change the manager. It is where you will need to make amends in your operating agreement. However, unless you already have a defined way to change or alter your operating agreement, it would be an uphill task for you.
Considering these points and many others, you should always define how you can change your operating agreement when drafting it. Otherwise, you may find yourself in kind of legal battles that you never wanted to involve yourself with.
LLC Member vs General Partner
It is something that you need to understand before you can start your LLC. While you can hire managers to operate your LLC, you and other members of your LLC can also become managers of your LLC and manage it.
The member that has been selected as the manager of the LLC can then be paid the salary as well. Furthermore, you can also share the membership interest with a person based on being a manager of your LLC. For example, you can make a person a member of your LLC who doesn’t have a capital contribution solely based on the person taking the responsibility of managing your LLC.
To understand it better, let’s take a look at two types of general partners and limited partners:
General Partner, and It’s Types
A general partner is the owner of a partnership, and it can be further divided into two types – an active partner and a silent partner. Active partners in a partnership take part in the operations of a partnership. In contrast, silent partners are the ones who have only contributed to the initial capital and don’t take part in the daily operations of a partnership.
General partners of a partnership are entitled to make the decisions of the partnership and represent the partnership. On top of all their duties and responsibilities, general partners of a partnership also have unlimited liability for the financial dealings.
Unlimited liability for the general partners makes them vulnerable in many ways. For example, if the partnership takes the debt, the detriment of the debt will also be passed to the general partners of the partnership. It is opposite to what an LLC offers to its members – an absolute limited liability.
To avoid this liability, partnerships can opt for a structure known as a limited partnership. In the limited partnership, the partnership can dedicate the liability to selected partners and exempt others. However, the members who then become the limited partners and aren’t liable for company finances can also not be the active partners of the partnership.
In a nutshell, while general partners can both be active partners and silent partners, limited partners can’t be active partners in a limited partnership. Their only option is to become a silent partner of the partnership.
The Management Structure
When you form your LLC, you are provided with two options to structure your LLC; member-managed LLC and manager-managed LLC. The primary difference between these two management structures will come down to who will manage the day-to-day operations of LLC.
If you have chosen a manager-managed structure for your LLC, you would have to document it on the formation paperwork of your LLC. If you don’t do this, your LLC will be considered a member-managed LLC by default.
It is important to note here that the kind of structure you choose for the management of your LLC would have no impact on the distribution and losses of the LLC.
Similarly, it will not affect how the members of the LLC will be taxed.
How To Document Your LLC Management Structure
While the majority of states don’t require you to outline your management structure when you are operating single-member LLC or when you plan your LLC to be member-managed, however, if you are structuring it as manager-managed, you would have to file your articles of organization as such that they define the managers and their roles in your LLC.
Number of Managers
There is no restriction on a multi-membered LLC regarding the number of managers that it can hire. Usually, small LLCs have one manager, and bigger LLCs have multiple managers who look after various business sections.
While passive ownership is a common concept in corporations, it is not so common in an LLC. However, an LLC can have one or more passive members, and there is no legal cap on that.
A passive member of an LLC has involvement only by virtue of their initial capital contribution in an LLC. They don’t enjoy any other rights in the management and everyday operations of an LLC.
Director Managed LLC
Director-managed LLCs have a board of directors to operate them, and the board of directors has absolute power of decision-making an LLC. An LLC can have one or multiple directors depending upon the size of the business and various other factors.
If an LLC has just one director, the sole director has all the power concentration regarding the decision-making of the LLC. However, if the board of directors has multiple directors, then a majority decision will be the final decision, including adding or removing new directors. Decision-making is, however, a big problem in LLCs, no matter which structure they are following.
LLC Member vs Manager Rights and Responsibilities
Both LLC members and managers have certain rights and responsibilities, and while some are common, there are some significant differences, and this section will look at them.
Upon acquiring the interest in the limited liability company, a member of an LLC is entitled to the economic rights in the LLC. One of the primary financial rights is to share the allocations of profits and losses of the LLC. They also have a right to share in distributions of the assets of the LLC upon its liquidation or when it is dissolved.
However, not all the members always have an equal share in the LLC, as the capital contribution could vary from member to member. The stake in the financial interests of an LLC is usually outlined in the company’s operating agreement.
On the other, the financial rights of the managers of LLC vary from those of members. Unless they are members as well, managers usually have an economic right to get paid fair compensation for their services. How and how much a manager will be paid in an LLC is also outlined in the operating agreement.
Voting rights vary as the nature of the LLCs varies. For member-managed LLCs, almost all members enjoy voting rights on the major decisions in the LLC. However, in a manager-managed LLC, the voting rights of LLC members are limited, and mostly, they are only limited to vote for removing or electing new managers and amend the articles of organization, an operating agreement, etc.
Derivative Suit Rights
Members also have a right to bring a derivative suit on behalf of LLC. A derivative suit is brought against the management of the LLC or others who have wronged against the LLC. While a member carries the derivative case, its actions belong to the LLC. So, if the lawsuit is won, the resulting compensation would go to the LLC.
A fiduciary is someone who controls the assets of an LLC. So, in a member-managed LLC, members are the fiduciaries, while in a manager-managed LLC, managers are the fiduciaries. A fiduciary owes the fiduciary duties to other stakeholders (members) in an LLC and to LLC itself.
In a nutshell, we can say that fiduciary duties mean that members or managers who are managing an LLC owe it to the rest of the LLC members to make decisions based on the interest of the LLC over their gains. So, a fiduciary duty is a fiduciary responsibility, and it is a right of the other members of an LLC.
If a fiduciary breaches the fiduciary duties, it will result in the liability of the member. It is a very simplified elaboration of the powers, rights, and responsibilities of the members and non-members. The members of an LLC have the sole discretion of allocating these duties and powers among themselves in the operating agreement.
Frequently Asked Questions
Take a look at some of the frequently asked questions I get regarding an LLC, its members, and general partners in a partnership:
- What is the Difference between LLC Member Manager vs General Partner?
An LLC member is the owner of the LLC and has limited liability when it comes to the financial dealings of an LLC. Similarly, a general partner is the part-owner of a partnership but shares an unlimited liability regarding the partnership’s financial transactions.
- Is the Manager of an LLC the owner?
Not necessarily, but there is no such restriction that stops an owner of an LLC from becoming its manager. LLCs usually hire professional managers to operate the LLCs, but they can also choose a fellow member of the LLC to run the LLC and become its partner.
In a professional manager who is not an LLC member, LLC members employ them and pay fair compensation for the services. It is essential to know that the members of an LLC, who are not the managers, do not get paid for being the members but share the profits and losses of the business.
- Does my LLC need a Manager?
There is no legal compulsion that asks LLCs to appoint their managers, and an LLC can work only with its members. However, the majority of the LLCs hire experienced managers to deal with all the operations of the LLC since not all the members are well-equipped to deal with the business and other operations of the LLC.
- Can you be the CEO of an LLC?
It is all down to the LLCs, and there is no legal provision that requires LLCs to have or not have a CEO. LLC members can appoint the CEO and any other kind of employee to operate their LLC. It is a significant difference between an LLC and a corporation, as corporations are legally required to have a CEO.
- Can there be two Managers of an LLC?
Since there is no legal requirement to have or not have a manager for an LLC, there is also no cap on how many managers an LLC can have if it decides to do so. An LLC can have two or even more managers to deal with various areas of business.
- Can you change an LLC’s Management structure?
Yes, it is possible. Members of an LLC have the sole discretion to change the management structure of its LLC according. However, this change has to follow what is written in the operating agreement of the LLC. Usually, the change is made after voting between the members, and once a change agreement is reached, LLC follows the amends in its articles of organization to the respective state.
- Does the Management structure of LLCs affect taxes?
No, the management structure of an LLC doesn’t have any impact on the taxes. The management structure of an LLC is something internal to the LLC, and taxes have to do with the parent company structure, LLC.