The Definition of an LLC Managing Member

By Edward A. Haman, J.D.

The Definition of an LLC Managing Member

By Edward A. Haman, J.D.

An owner of an interest in a limited liability company (LLC) who also runs the day-to-day business operations is known as a "managing member" of the LLC. This creates a few differences from an LLC where the member and manager functions are kept separate.

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Basic LLC Ownership and Operation

The operation of an LLC typically involves two types of individuals:

  1. Members. An LLC member is a person who has an ownership interest in the LLC. A member of an LLC is similar to both a shareholder and a director in a corporation. A member, being an owner of the LLC, has the authority to make major business decisions, such as to enter into contracts on behalf of the LLC, and to buy and sell company assets. A member shares in the profit or loss of the business, but does not receive a salary or wages.
  2. Managers. An LLC manager is a person who is hired by the members to have the responsibility of running the day-to-day business operations. An LLC manager is similar to an officer of a corporation. The manager is an employee of the LLC, and only has the authority that is given by the LLC operating agreement, or as specifically granted by the members. For example, the manager would most likely be authorized to purchase supplies needed for daily business operations, but would not be authorized to enter into contracts, or to sell or mortgage major company assets. A manager receives a salary, but is not entitled to share in the profit or loss of the LLC.

There are also two types of LLCs:

  1. Single-Member LLC. This is where there is only one member, who is the owner of 100% of the business.
  2. Multi-Member LLC. This is where there are two or more members. The members can either share equally in the profit or loss of the business, or can have unequal shares as determined by the LLC operating agreement.

LLC Manager Arrangements

There are two types of LLC manager arrangements:

  1. Manager-Managed LLC. This is where the members hire one or more managers to run the daily operation of the business. The members do not take an active role in the day-to-day operation of the business. A hired manager is not a member of the LLC.
  2. Member-Managed LLC. This is where one or more of the members also act in the role of manager. A member who also acts as a manager is called a managing member. In a typical single-member LLC, it is very common for the single member to also be the managing member. In a multi-member LLC, it is also possible for one or more of the members to also be a managing member.

Effects of Being a Managing Member

For an LLC member who also has management responsibilities, there are issues specific to his or her personal liability and taxation.

Personal Liability

A managing member retains the limitation of personal liability afforded by the LLC. However, both members and managers can be held personally liable for their actions that aren't within the scope of business operations. For example, while a member isn't personally liable for breach of a contract by the LLC, a member can be held personally liable if he or she injures a person while driving a company vehicle. Since a managing member is more involved in the day-to-day operation of the business, he or she may have a greater potential for personal liability than a non-managing member.

In the capacity of manager, the managing member is also subject to personal liability in a legal action by the LLC, if the other members can establish that the managing member has caused harm to the company, such as through negligent mismanagement or misappropriation of funds.

Taxation

Generally, a member of an LLC is taxed on his or her share of the company's profit. That share is taxed as passive income, similar to corporate dividends. However, because a managing member is actively participating in the operation of the business, some or all of the profit may be considered by the IRS to be earned income, and therefore subject to self-employment tax. To avoid, or at least minimize, this issue, it would be wise to seek the advice of a tax professional if you will have a managing member for your LLC.

Generally, a non-managing member of an LLC will be taxed on certain fringe benefits he or she receives, such as medical insurance paid by the company. A managing member, having his or her income considered as earned income rather than passive income, may be able to enjoy a tax-free receipt of fringe benefits.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.