Alongside the corporation and the partnership, the Limited Liability Company (LLC) is probably the most popular and a well-established business form in the US. When people talk about the LLC and how to form one, the terms members and managers come up again and again. We have put together everything you need to know about them.
The legal owners of an LLC are called members. In a corporation, by contrast, the owners are shareholders or stockholders. The members provide the capital to form the LLC and hold a membership certificate. Their stakes are called interests. The people who run the LLC, on the other hand, are called managers. In a corporation, that role belongs to the directors.
Usually one or two members are involved in the LLC's day-to-day business. But they don't always have to hold a manager role. So member management of an LLC is not automatic.
A member-managed LLC versus a manager-managed LLC
An LLC can be run as a sole proprietorship or as a small company, as is often the case with start-ups. If one (or several) of the owners run the LLC, it is a member-managed LLC.
In that case, the owners (the members) are also the managers. This is very common.
If, however, the LLC is run by one particular member (the managing member), the company counts as a manager-managed LLC.
Member-managed or manager-managed: what you actually decide
The two terms describe who runs the LLC towards the outside world. Member-managed means the owners run the company themselves: the members act and sign on its behalf. Manager-managed means the owners hand management to one or more managers, who then decide and sign for the company. A manager does not have to be a member. That is what the LLC statutes of Wyoming (W.S. 17-29-407), Florida (Fla. Stat. 605.0407), Delaware (6 Del. C. § 18-402) and New Mexico (NMSA 53-19-15) say.
In all four states, member-managed is the default. Wyoming and Florida require an express statement in the articles of organization or the Operating Agreement for the manager version, such as "the company is manager-managed". In Delaware, management rests with the members unless the LLC agreement provides otherwise; in New Mexico it stays with the members unless the articles give it to a manager. So if you set nothing out, you have a member-managed LLC.
Who is publicly visible depends on the state, not on the model. Wyoming and Delaware only require the company name and the Registered Agent in the formation document (W.S. 17-29-201, 6 Del. C. § 18-201). New Mexico also requires a statement of whether a manager runs the company, but no name (NMSA 53-19-8). In Florida, naming members or managers in the articles is voluntary, but the annual report requires the name and address of at least one person authorized to manage the company (Fla. Stat. 605.0201 and 605.0212). More on this under anonymity.
Our recommendation for founders without a US residence: with a single-member LLC, stay with the default. You are the member, you run the company yourself and you sign contracts and the account application in that role; there is no second person whose position you would have to explain to a bank. Manager-managed only pays off when someone else is meant to run the day-to-day business, or when co-owners are in only as investors and should not sign. Either way, the decision belongs in the Operating Agreement, because without your own rule the state's default law applies. If you are unsure which structure fits your case, we will work it out in a consultation (held in English only).
The LLC Operating Agreement
The roles of members and managers are set out in the Operating Agreement.
So if a manager-managed LLC is to appoint a manager who is not one of the members, for example because that person is a specialist in a particular sector, this is set out in the Operating Agreement.
Even in member-managed LLCs, it is common for not all members to be involved in the day-to-day business; some are simply passive investors.
The rules for this are also found in the Operating Agreement. Managers who run the business can be elected at regular meetings.
The Operating Agreement sometimes sets out not only the manager's role but also certain fiduciary duties, among other things.
Single-member LLC versus multi-member LLC
LLCs are not only distinguished by whether they are member-managed or manager-managed. There is also the distinction between a single-member LLC and a multi-member LLC.
This is about the number of owners (the number of members). An LLC can consist of a single member, in which case it is called a single-member LLC, or it can have several members, in which case it is a multi-member LLC.
Especially for a multi-member LLC, company law experts stress the importance of the Operating Agreement. It also records how each member contributes to the company.
On formation, each member pays a capital contribution into the company's account in proportion to their membership interest. If the company makes a profit, distributions are paid to the members as business owners in line with the Operating Agreement, based on their contributions or interests.
With this flexibility and its tax advantages, the LLC has become one of the most popular company forms in the US and is especially popular for small businesses and start-ups. If you want to put these advantages to work for yourself and learn more about management structures, the manager-managed structure or the tax set-up of the LLC, we are happy to advise you individually, in a consultation held in English.