What’s the Role of a Managing Member in an LLC?

LLCs can be formed as member-managed or manager-managed companies. Both types of LLCs have managing members who lead the company’s daily operations. They’re the main decision-makers of the business, dictating how the company is run.

Before forming an LLC, it helps to understand the role of its managing members. Today, we look closely at their responsibilities and how they differ across LLC management structures.

Key Takeaways

• An LLC’s management structure defines a managing member’s role.
• Member-managed LLCs have individuals owning and operating their businesses. Meanwhile, manager-managed LLCs appoint managers to handle their daily operations.
• Managing members hold certain rights and perform specific responsibilities, including decision-making and fiduciary rights.
• LLC operating agreements must define the role of managing members through relevant provisions.
• Managing members are also obligated to keep an LLC compliant with current legal requirements.

An Overview of Member & Manager-Managed LLCs

To understand a managing member’s role in an LLC’s operations, you must look at the entity’s management structure. Again, LLCs can be member-managed or manager-managed.

In member-managed LLCs, all members make major business decisions. Each individual is allowed to handle the company’s operations, although other member-managed LLCs grant this right to selected members.

Member-managed LLCs typically require a majority vote to resolve disputes. But in some cases, these LLCs must get unanimous consent to take specific actions.

Conversely, manager-managed LLCs can have multiple managers who decide the LLC’s actions without member consent. These people may handle the company’s operations or appoint officers to do so. Some established LLCs are operated this way, although smaller LLCs can appoint one or more managers to oversee its operations.

Can LLC Members Choose Not to Manage the Business?

In the LLC structure, members can choose not to manage the business. Some LLC owners delegate management responsibilities to trusted individuals, making them passive investors. But in other LLCs, managing members can act as owners and managers of the business.

The Rights & Responsibilities of Managing Members

An LLC’s managing members may have the following rights and responsibilities.

Making Business Decisions

Managing members are often tasked with business decision-making that impacts various aspects of an LLC’s operations. In general, this role includes:

• Entering into contracts and agreements on the LLC’s behalf
• Managing the company’s financial transactions
• Hiring and terminating employees
• Conducting strategic planning for long-term business growth
• Representing the LLC in legal matters and negotiations
• Keeping the business compliant with state and federal requirements

Your LLC’s operating agreement should establish how involved a managing member is in the decision-making process. Otherwise, the individual’s authorities may be questioned or limited.

Voting on Major Decisions

LLCs can also grant voting rights to members, depending on their management structure.

If you own a member-managed LLC, you and your co-owners can vote on major business decisions. This rule doesn’t apply to manager-managed LLCs, where designated managers hold voting power.

Checking Business Records

In some jurisdictions, LLCs are required to keep specific documents and allow its members to check them.

These documents contain the names, addresses, contributions, and shares of business profits and losses of each LLC member. Additionally, they can include the names and addresses of the LLC’s managers and specific tax records.

Performing Fiduciary Duties

Managing members owe fiduciary duties to the LLC and its other members, including:

• Duty of good faith – Acting honestly and fairly when conducting business on the LLC’s behalf
• Duty of care – Making informed business decisions
• Duty of loyalty – Managing the LLC with its best interests in mind

Fulfilling Certain Obligations

LLCs reduce personal liability for business debts or obligations. Nonetheless, LLC members and managers have certain obligations to the business.

In member-managed LLCs, members must make capital contributions to the business. Conversely, managers of a manager-managed LLC may be liable for failing to perform their responsibilities or violating the terms of the company’s operating agreement.

Bearing the Right to Indemnification

If an LLC’s managing member incurs expenses and liabilities while facing legal claims of misconduct, they can be indemnified. In short, the LLC can reimburse these expenses to the individual.

LLCs in some jurisdictions are either obligated or allowed to indemnify their managers and members. Other states leave the decision to the LLC.

Operating Agreements & LLC Management

An LLC’s operating agreement defines a managing member’s authority, responsibilities, and limitations. As you draft this document, you must include specific terms to guide managing members in fulfilling their responsibilities within the LLC.

Essential Provisions for Managing Members

Operating agreements can include the following provisions for managing members.

Related Resource

Learn more about an operating agreement from NCH’s 60 Second Business Tip series.

A Note on Ensuring Compliance for Managing Members

Regardless of whether an LLC is member-managed or manager-managed, its managing members must ensure that the business follows state and federal regulations. This responsibility involves:

• Submitting annual reports to the LLC’s home state
• Maintaining a registered agent for the business
• Updating an LLC’s information when needed
• Filing state and federal tax returns
• Adhering to specific laws and regulations such as:
  • Employment laws
  • Industry-specific regulations

Related Resource

Discover the most overlooked compliance tasks for LLCs on the NCH blog.

Frequently Asked Questions

What does a managing member do in an LLC?

A managing member oversees the LLC’s day-to-day operations and makes major business decisions on the company’s behalf. LLC operating agreements define this individual’s authority and responsibilities, including:

• Financial management
• Hiring decisions
• Strategic planning for business growth

Can an LLC owner be a managing member?

Yes, an LLC owner can be a managing member. Manager-managed LLCs have owners who run the business, while manager-managed LLCs appoint other people to handle their operations. Your operating agreement should state who owns your LLC and whether they serve as a managing member.

What’s the difference between a managing member & a regular member in an LLC?

A managing member handles the LLC’s daily activities themselves, while regular members typically serve as passive investors. Some LLC owners have a stake in their businesses but are less involved in company operations.

Moreover, managing members make major business decisions. Regular members usually vote on these decisions.

Can an LLC have multiple managing members?

Yes, an LLC can have multiple managing members. However, its operating agreement must clearly define each person’s authority and responsibilities. 

The document should state how each managing member should make decisions and what they can manage. Also, it should describe how conflicts between managing members are resolved.

How does an LLC appoint a managing member?

An LLC can appoint a managing member by naming them as such on its operating agreement. Alternatively, LLC members can choose the individual themselves.

The operating agreement must outline the selection process and voting thresholds for the latter. Once a managing member is appointed, it must be formalized.

How is a managing member compensated?

A managing member can be compensated through methods such as:

• Regular salaries
• Management fees
• Adjusted shares of ownership
• Performance-based bonuses

The compensation structure should be specified in the operating agreement. Moreover, it may combine multiple methods for fair compensation.

Can a managing member be removed or replaced?

Yes, a managing member can typically be removed or replaced. The necessary procedures must be followed according to the terms of your LLC’s operating agreement. For instance, a managing member’s removal may require a majority or unanimous vote of the members.

What happens if a managing member wants to resign?

If a managing member wants to resign, they and the LLC must undergo procedures outlined in the operating agreement. The steps in the actual process vary depending on the established provisions.

Resignations in LLCs follow a formal procedure that includes:

• Notifying the company of the individual’s resignation
• Conducting turnovers
• Transferring ownership interests

Are managing members liable for an LLC’s debts?

No, managing members aren’t liable for an LLC’s debts. That’s because the LLC separates its members and their assets from the entity’s debts and obligations. But if a managing member breaches their fiduciary duties to the LLC, they may be held liable for their misconduct.

How do I remove an underperforming managing member from my LLC?

To remove an underperforming managing member from your LLC, you must follow the procedures outlined in your operating agreement.

In this case, the individual must receive a formal termination notice and turn over important documents and equipment to the LLC. And if terminations are voted on, your operating agreement should specify voting rights and thresholds.

Expert Tips From NCH

1. Draft an operating agreement with terms governing managing members. The document should define a managing member’s authority and duties, removal procedures, and other relevant aspects.
2. Schedule meetings to discuss your LLC’s financial performance, long-term strategy, and major business decisions. While meetings aren’t legally required, they keep LLC members informed about developments in the company’s operations.
3. Conduct succession planning after your LLC’s formation. Develop a comprehensive plan that addresses the voluntary departure, incapacitation, death, and removal of LLC members.

Ensure Proper Management of Your LLC

Managing members of LLCs hold significant power over business operations. They ensure efficient operations while upholding accountability for their actions. When you fully understand a managing member’s role in an LLC, you help your business achieve long-term success and avoid potential conflicts.

Are you opening a member-managed or manager-managed LLC? NCH’s professional business formation service is here to help you start your venture.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.