The Definition of an LLC Managing Member

By Rob Jennings J.D.

Not all LLCs have a managing member; in a manager-managed LLC, the members own the company and the manager is a non-member employee who runs the company. A managing member of an LLC is an individual who holds an ownership interest in the company, participates in its day-to day management and has authority to contract on behalf of the company.

Managing Member Authority

Unlike non-managing members, the managing member of an LLC is an agent of the company. He has the authority to buy and sell company property in the ordinary course of business, hire and fire employees, direct company operations and bind the company by entering into contracts on its behalf. Non-managing members, on the other hand, are not agents of the company and have no authority beyond that given them in the operating agreement.

Managing Member Liability

The limited liability shield protects LLC non-managing members and managing members alike from torts committed by each other and company employees. It does not, however, protect any member from liability for his own torts in or outside of the ordinary course of business. Because a managing member is personally engaged in company operations, his activity will necessarily expose him to higher liability than a non-managing member. Managing members can be held personally liable when their negligent or intentional behavior causes injury to another person. Furthermore, managing members may be sued personally by the LLC when their behavior causes injury to the company, thereby prejudicing the interests of the non-managing members.

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Self-Employment Tax

Self-employment tax is an additional tax of 15.3 percent levied against the income of individuals who work for themselves and represents the portion of Social Security and Medicare taxes for which that individual's employer would have been responsible. While Internal Revenue Service rules regarding who must pay self-employment tax are complex, in general, the earnings of an LLC managing member are considered earned income and are subject to this tax. Distributions paid to non-managing members are generally considered passive income, akin to dividends from stock in corporations or other investment income, and are not subject to the self-employment tax under current law. Involving a CPA or an experienced business attorney in the drafting of the LLC operating agreement can help LLC organizers structure the company so as to minimize the taxes paid by all members.

Fringe Benefits

The classification of an LLC managing member's income as earned income instead of passive income gives him the opportunity to receive "fringe benefit" tax consideration for certain payments made on his behalf by the company. Health insurance benefits, for example, are deductible to the company and under current law, pass to the managing member free of income tax. Benefits paid on behalf of non-managing members, however, are not protected this way.

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LLC Managers vs. Members
 

References

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