By Jake Lawson, LLC Formation Strategist
The member-managed vs. manager-managed decision trips up more entrepreneurs than almost any other LLC topic. After helping over 1,200 businesses set up their management structures, I can tell you that 90% of people overthink this choice.
Here’s the bottom line upfront: Most small businesses should choose member-managed. It’s simpler, more straightforward, and matches how most entrepreneurs actually run their companies.
But let me explain exactly what these terms mean, when each makes sense, and how to avoid the common mistakes that can create legal headaches later.
What These Terms Actually Mean (Without the Legal Jargon)
Member-Managed LLC: Everyone’s in Charge
In a member-managed LLC, all owners (members) have the authority to make decisions and sign contracts for the business.
Think of it like a small partnership where everyone who owns part of the business can act on behalf of the business. If you own 10% or 90% of the LLC, you can still sign contracts, open bank accounts, and make business decisions.
Real-world example: Sarah and Mike own a 50/50 consulting LLC. In a member-managed structure, either Sarah or Mike can sign client contracts, approve expenses, hire contractors, or make other business decisions without needing the other’s permission first.
Manager-Managed LLC: Designated Decision-Makers
In a manager-managed LLC, only designated managers have the authority to make decisions and sign contracts. Other owners (members) take a passive role.
The managers can be owners themselves, or they can be hired from outside. Non-managing members can’t bind the LLC in contracts or make operational decisions—they’re essentially passive investors.
Real-world example: Steve and Susan own a real estate LLC but live in another state. They hire Tom (a local real estate expert) as the manager. Only Tom can sign purchase agreements, hire contractors, or make day-to-day decisions. Steve and Susan receive profits but can’t make business decisions directly.
Why This Choice Matters More Than You Think
The management structure you choose affects:
Legal Authority: Who can sign contracts and bind the LLC
Day-to-Day Operations: Who can make business decisions
Banking: Who can open accounts and authorize transactions
Liability: Who’s responsible for business decisions
Investor Relations: How passive investors are protected
Third-Party Dealings: Who vendors and clients can deal with
Real Consequences of Getting This Wrong:
I’ve seen an LLC member sign a $50,000 contract thinking they had authority, only to discover the LLC was manager-managed and their signature was invalid. The vendor sued, and it became a mess that could have been avoided with clearer management structure.
Member-Managed LLC: When and Why to Choose It
Best For:
- Small businesses with 1-4 active owners
- Partnerships where everyone wants decision-making authority
- Family businesses where multiple family members are involved
- Simple business structures without passive investors
- Service businesses where owners work in the business
Advantages:
Simplicity: No need to designate managers or create complex decision-making processes
Flexibility: All owners can act on behalf of the LLC
Speed: Decisions can be made quickly without consulting managers
Lower costs: No need to hire external managers
Disadvantages:
Potential chaos: Multiple people with authority can create conflicts
Liability exposure: All members can bind the LLC, potentially creating unwanted obligations
Investor concerns: Passive investors might not want operating authority
Banking complications: Banks sometimes prefer dealing with single authorized representatives
When Member-Managed Works Well:
Scenario 1: Two doctors opening a medical practice Both want to be able to sign vendor contracts, hire staff, and make operational decisions. Member-managed gives them equal authority.
Scenario 2: Solo entrepreneur with spouse as minority owner The business owner wants full operational control, but the spouse (5% owner) might occasionally need to sign documents when the main owner is traveling.
Manager-Managed LLC: When It Actually Makes Sense
Best For:
- Businesses with passive investors who don’t want operational involvement
- Real estate investments where some owners provide capital, others provide expertise
- Family businesses where only certain family members should have authority
- Multi-state operations where local managers are needed
- Complex businesses requiring professional management
Advantages:
Clear authority: Designated managers have sole decision-making power Investor protection: Passive members can’t create unauthorized obligations Professional management: Can hire expert managers who aren’t owners Simplified banking: One or few authorized representatives Liability limitation: Non-managing members have limited exposure
Disadvantages:
Complexity: Requires clear manager designation and authority definitions Potential conflicts: Members might disagree with manager decisions Higher costs: May need to pay external managers Reduced flexibility: Only managers can make decisions
When Manager-Managed Makes Sense:
Scenario 1: Real estate syndication Five investors contribute money, but only one (the syndicator) manages properties. The manager-managed structure protects passive investors from liability while giving the active partner clear authority.
Scenario 2: Family business succession Parents want to transition authority to one child while retaining ownership. The designated child becomes the manager while parents remain members.
The Three Types of Manager-Managed LLCs
1. Internal Manager-Managed
Structure: Some owners are managers, others are passive members
Example: 4-person LLC where 2 members provide capital and 2 members (who are also managers) run operations
2. External Manager-Managed
Structure: Non-owner serves as manager, all owners are passive
Example: Investment LLC where owners hire a professional property manager who isn’t an owner
3. Hybrid Manager-Managed
Structure: Mix of owner-managers and external managers
Example: Real estate LLC with owner-managers plus hired property management company
Single-Member LLCs: A Special Case
For single-member LLCs, the member-managed vs. manager-managed choice is usually irrelevant since there’s only one owner. However, there are a few scenarios where manager-managed might make sense:
Choose Manager-Managed If:
- Privacy concerns: You don’t want to be publicly identified as the owner
- Succession planning: Setting up structure for future managers
- Professional management: Hiring someone else to run operations
- Multiple LLCs: Creating consistent management across entities
Reality Check:
95% of single-member LLCs should choose member-managed. It’s simpler and matches how most solo entrepreneurs actually operate.
Common Mistakes That Create Problems
Mistake #1: Choosing Manager-Managed for the Wrong Reasons
Wrong reason: “It sounds more professional”
Reality: Member-managed vs. manager-managed doesn’t affect how professional your business appears to outsiders
Wrong reason: “I want to be called a manager instead of a member”
Reality: You can have the title “Manager” internally regardless of your LLC structure
Mistake #2: Not Documenting Manager Authority
The problem: Choosing manager-managed but not clearly defining what managers can and cannot do
The consequence: Confusion about authority, potential liability issues, disputes with members
The solution: Create detailed operating agreement language about manager powers and limitations
Mistake #3: Mixing Structures Accidentally
The problem: Filing as manager-managed but operating as if all members have authority
The consequence: Invalid contracts, liability issues, confused third parties
The solution: Match your operations to your chosen structure
Mistake #4: Not Planning for Changes
The problem: Choosing a structure without considering future business evolution
The consequence: Expensive and complicated restructuring later
The solution: Consider where your business might be in 3-5 years
How to Change Your Management Structure Later
Good news: You can change from member-managed to manager-managed (or vice versa) later. Here’s how:
The Process:
- All members must agree to the change
- Amend your operating agreement to reflect new structure
- File amendment with state (if your state requires management structure in formation documents)
- Notify banks and other parties of the change
- Update internal procedures to match new structure
Typical Costs:
- Operating agreement amendment: $200-500 if using attorney
- State filing fee: $25-100 depending on state
- Total timeline: 2-4 weeks
State-Specific Considerations
States That Require Management Choice on Formation Documents:
- Delaware
- Nevada
- Wyoming
- Several others
States That Don’t Require Management Choice:
- California
- Texas
- Florida
- Most others
If your state doesn’t require it on formation documents: You can decide in your operating agreement and change later without state filings.
If your state requires it on formation documents: You’ll need to file an amendment to change management structures.
Banking and Management Structure
Banks care about management structure because they need to know who has authority to:
- Open accounts
- Sign checks
- Authorize transactions
- Close accounts
Member-Managed Banking:
- Any member can typically open accounts
- All members may have signing authority
- Banks might require all members’ signatures for some transactions
Manager-Managed Banking:
- Only designated managers can open accounts
- Clearer authority structure for banks
- Simpler account management with fewer authorized signers
Jake’s Banking Tip: If you choose member-managed but want to limit banking authority, you can restrict it in your operating agreement and banking resolutions.
My Decision Framework
After helping 1,200+ businesses with this choice, here’s my simple decision framework:
Choose Member-Managed If:
You have 1-4 owners who all work in the business, Everyone wants decision-making authority, You prefer simplicity over complexity, You don’t have passive investors, You want maximum operational flexibility
Choose Manager-Managed If:
You have passive investors who don’t want operational involvement, Only some owners should have decision-making authority, You’re hiring professional management, You need clear authority structure for complex operations, You’re planning for future management succession
When In Doubt:
Start with member-managed. You can always change later, and it’s simpler to understand and implement.
Frequently Asked Questions
Can I have both members and managers with decision-making authority?
In a manager-managed LLC, only managers have authority to bind the LLC. Members can advise managers, but they can’t make binding decisions unless they’re also designated as managers.
What if a member signs a contract in a manager-managed LLC?
The contract might be invalid since the member lacks authority. This can create legal problems and disputes. Always ensure the right people are signing contracts.
Do I need an operating agreement to establish management structure?
Highly recommended. While some states default to member-managed, an operating agreement clarifies authority, prevents disputes, and provides legal protection.
Can managers be removed?
Yes, members can typically remove managers if they agree (usually unanimous or majority vote, depending on operating agreement). The specific process should be outlined in your operating agreement.
Do managers have to be paid?
Not necessarily. Owner-managers often aren’t paid separately for management duties. External managers typically receive compensation. The arrangement should be clear in your operating agreement.
Can I change management structure without member approval?
No, changing management structure typically requires agreement from all members (or whatever threshold is specified in your operating agreement).
Jake’s Final Recommendations
After 15+ years of helping businesses with this decision, here’s my honest advice:
For 90% of small businesses: Choose member-managed. It’s simpler, more flexible, and matches how most entrepreneurs actually operate.
For businesses with passive investors: Choose manager-managed to protect passive members and provide clear operational authority.
When you’re unsure: Start with member-managed and change later if needed. The switching costs are reasonable, and starting simple is usually better than overcomplicating things.
Most importantly: Whatever structure you choose, document it clearly in your operating agreement and operate consistently with your choice.
The member-managed vs. manager-managed decision isn’t about prestige or complexity—it’s about matching your legal structure to how your business actually operates. Choose the structure that fits your reality, not the one that sounds more impressive.
Jake Lawson has guided over 1,200 entrepreneurs through LLC management structure decisions. His recommendations are based on real client experiences and 15+ years of hands-on business formation expertise. For more LLC guidance and operating agreement templates, visit llciyo.com.
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