The owners of a limited liability company (LLC) are called members. As a member, owners participate in the management of the company. An LLC may also choose to employ outside employees as management of the business. Further, the members may agree that one or more of the members act as managers, managing the day-to-day activities of the LLC.
Approval by the Members
As owners of the LLC, members have management authority over the business, including determining who operates it on a day-to-day basis.
Frequently, one or more members of the LLC manage the business. If the business decides to pay a managing member as an employee in addition to sharing in the profits as a member, members must approve of this arrangement. Often, an LLC considers this possibility and outlines how to approach it in its articles of organization or operating agreement. An LLC must take steps to avoid a situation where one of the members works as a manager and expects payment while the other members assume he or she is acting in their capacity as a member and does not expect payment from the business.
The LLC may also choose an outside manager that is not a member to manage the business. As in choosing members to act as managers, the members of the LLC must approve the manager. Outside managers do not have an ownership interest in the LLC. As a result, outside managers do not receive profits from the operation of the business as members do.
The LLC's articles of organization, operating agreement, or action by the members determines the extent of the authority for a managing member or outside manager. Typically, a manager may enter into binding contracts on behalf of the LLC. The manager is not personally liable for a contract entered into on behalf of the LLC if that contract is within the scope of his or her employment.
Members and managers of the LLC have income that is taxed differently. Managers of the LLC receiving a salary are taxed as employees of the LLC. This includes withholding of any taxes, as appropriate.
Members of the LLC report their share of earnings from the LLC on their individual income tax returns if the LLC has elected pass-through taxation.
If the LLC employs a member as a manager of the LLC and he or she receives a salary, he or she is taxed as an employee for his or her management salary and as a member for the share of the profits earned from the LLC.
As with any financial considerations for a business, consult with an accountant or other tax professional when considering paying one or more members as employees. Be advised, any salary must be reasonable and is subject to review by the Internal Revenue Service.
The Difference Between LLC Managers and Members
Members are the owners of the LLC. Managers of the LLC are responsible for the day-to-day operation of the LLC. Managers may be members or outside parties. Members acting as managers may receive a salary beyond their share of the profits from the LLC.
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