Understanding the difference between LLC members and managers is important. Learn the key distinctions - and which ones you need.

We’re sure that by this time around, you have heard the terms LLC or Limited Liability Company, Sole Proprietorship, LLC Members vs. LLC Managers, and just like many,  this may have somehow caused confusion or a mix-up to put it coyly. Before we dive into the differences between an LLC member and a manager, let’s briefly understand the different types of businesses. Once we’ve defined these, then understanding the difference between LLC members and managers will come clearer.

Usually, people with an entrepreneurial mindset who want to break free of their 9-5 job, or those who are burnt out with being just a cog in the machine, may have thought of wanting to start their own business. Of course! Who wouldn’t? You have complete control of your time; you can do whatever, whenever, and wherever; what’s more, is that you get to do something you love. As they say, “Choose a job you love, and you will never work a day in your life.” This is probably one of the biggest reasons entrepreneurs leave the corporate world and switch to running their businesses.

So, everything’s ready. Your products, your strategies, and maybe even a marketing plan in place. All that except one thing-the kind of business registration they should have. Should the registration be for a sole proprietorship? Should you go for a limited liability company? And if you choose to be an LLC, what is the difference between the LLC members vs. LLC Managers?

A business under sole proprietorship refers to a kind of business owned by someone personally responsible for its debts and other financial obligations. This type of business is not a legal entity and is considered the most popular business due to its simplicity.  A business in this category can use a fictitious name and will only be used for trade naming purposes and does not create a legal entity separate from the sole proprietorship’s owner. If you’re looking at starting a small business and you don’t see the need to grow in number and location, a sole proprietorship may be ideal for you.

Many people prefer this kind of business because all that needs to be done is register their name, secure local/state licenses, and just like that, you’re ready to start! While this may sound promising, especially to those who want to start a small business with little to no fuss, keep in mind that you are solely liable for the business’s debts and expenses as the sole owner of the company. This means that if the sole proprietor’s business runs into any debt, financial trouble, or discrepancy, the business owner will file lawsuits and pay the business’s debt with their own money.

In circumstances that involve signing contracts, checks, and other legal documents, the sole proprietorship owner signs contracts in their name because there is no separate legal identity. Similarly, as a sole proprietorship business owner, you will also have checks written in your name.

As a sole proprietorship business owner, you can enjoy the luxury of blending your personal and business funds, which you can no longer do when you are in a partnership, corporation, or a Limited Liability Company. In addition, as a sole proprietor, you can also have your bank accounts in your name and may not have to go through the complexities of businesses. When it comes to lawsuits (and being sued), it is evident that the case will be filed using your name since you are a sole proprietor.

Taxation for a sole proprietorship is simple because it is indistinguishable from its owner. The income earned by the business is also considered as income earned by its owner.

registration be for a sole proprietorship? Should you go for a limited liability company? And if you choose to be an LLC, what is the difference between the LLC members vs. LLC Managers?

A business under sole proprietorship refers to a kind of business owned by someone personally responsible for its debts and other financial obligations. This type of business is not a legal entity and is considered the most popular business due to its simplicity.  A business in this category can use a fictitious name and will only be used for trade naming purposes and does not create a legal entity separate from the sole proprietorship’s owner. If you’re looking at starting a small business and you don’t see the need to grow in number and location, a sole proprietorship may be ideal for you.

Many people prefer this kind of business because all that needs to be done is register their name, secure local/state licenses, and just like that, you’re ready to start! While this may sound promising, especially to those who want to start a small business with little to no fuss, keep in mind that you are solely liable for the business’s debts and expenses as the sole owner of the company. This means that if the sole proprietor’s business runs into any debt, financial trouble, or discrepancy, the business owner will file lawsuits and pay the business’s debt with their own money. 

In circumstances that involve signing contracts, checks, and other legal documents, the sole proprietorship owner signs contracts in their name because there is no separate legal identity. Similarly, as a sole proprietorship business owner, you will also have checks written in your name.

As a sole proprietorship business owner, you can enjoy the luxury of blending your personal and business funds, which you can no longer do when you are in a partnership, corporation, or a Limited Liability Company. In addition, as a sole proprietor, you can also have your bank accounts in your name and may not have to go through the complexities of businesses. When it comes to lawsuits (and being sued), it is evident that the case will be filed using your name since you are a sole proprietor.

Taxation for a sole proprietorship is simple because it is indistinguishable from its owner. The income earned by the business is also considered as income earned by its owner.

What is an LLC or a Limited Liability Company?

As opposed to the sole proprietorship, where the business owner and the business itself are not a legally separate entity, in this case, the LLC is legally a separate entity from the business owner. An LLC may have one owner only or a single-member LLC but can also have more than one owner, thus making it a multi-member LLC. In both cases, each of the owners is an LLC member. This type of ownership has the advantage of a corporation’s protection against personal liability and a partnership’s pass-through taxation. 

In addition, pass-through taxation refers to how a pass-through business is taxed, which pays little to no taxes. In this case, a limited liability company is considered a pass-through business because it pays its taxes through the LLC Member’s tax return.

Meanwhile, a corporation is a separate entity formed by incorporation and is an entirely separate entity from its owners and owned by the stockholders. A board of directors administratively runs it and appoints officers who run the daily operations.

When a business is incorporated by a group of shareholders who have ownership of a corporation, a company becomes a corporation. In this case, the shareholders are represented by their holding of all their common stocks. Not all corporations are made for profit. Some are made for charities and other non-profit corporations. In most cases, corporations are made to give back to their shareholders. 

Read more about the differences between an LLC and a Corporation!

A lot of business owners like the flexibility of having an LLC. An LLC business does not require formal requirements of a corporation like passing bylaws, not to mention frequent shareholder meetings because of the need for unanimous decisions. The best thing about this business type is that they allow business owners to choose precisely how they want to pay their taxes. In most cases, pass-through taxation is how LLCs are taxed. They may also choose to pay their taxes as a corporation. The management structure of an LLC is also flexible. This business type can be member-managed or manager-managed. LLC members can be the ones to take charge of the business, or they can also have an LLC manager take control of the daily operations. Whether the member or the manager should manage them should be clearly stated in its written policies/procedures.

LLC Member vs. Manager: What’s the difference?

LLC Members

When simply put, an LLC Member is the owner of the business where each member has significantly contributed to secure his stake in the company. The contribution may be in the form of seed money, start-up funds, physical assets like company equipment, office space, etc.  No matter their role, all LLC members are interested in the company and allow them the voting rights, a portion of the business profits, and should be outlined in the company’s statement of policies.

LLC Managers

An LLC manager is someone (maybe an individual or group) chosen or appointed by the LLC member or LLC members to run the company’s daily operation. LLC managers can either be individuals or other businesses that can manage an LLC, such as a corporation or another limited liability company. Most LLCs are member-managed, but many opt to be manager-managed or supervised by a third-party manager. In some LLCs that are not too stringent with their structure, some members who are not officially managers of the LLC can act as a manager but not necessarily be a member-manager. In this situation, only the managers can use the LLC’s name in contracts and service agreements, and exchanges. 

Member-Managed LLC

When an LLC chooses member management, it simply means that all the LLC members are given a role in running the business’s day-to-day. Since most LLCs are small in size with limited resources,  most members usually like this option for cost and multi-function roles in the company. The LLC member-manager is directly involved in management decisions.

If you are the kind of business owner/owners who wants to do all the work, such as making the product, selling the product, taking orders from the sales channels, etc., you may wish to have your LLC member-managed. Let’s take a restaurant as an example. Suppose you’re going to be the one making most of the business decisions such as hiring employees, making the food, thinking of menu items, studying which items are sellable and not. In that case, your LLC will operate as a member-managed LLC.

In most of the US and Canada, small businesses or LLCs are member-managed by default under state law. 

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Difference Among Sole Proprietorship, LLC, and Corporation

• Sole Proprietorship – This kind of business is usually owned by a single person who runs everything in the business. There is no separate legal entity or business name.

• LLC –  An LLC is legally a separate entity from the business owner. An LLC may have one owner only or a single-member LLC but can also have more than one owner, thus making it a multi-member LLC. In both cases, each of the owners is an LLC member.

• Corporation – A corporation is a separate entity formed by incorporation and is an entirely separate entity from its owners and owned by the stockholders. A board of directors administratively runs it and appoints officers who run the daily operations and is not managed by any LLC member or manager.

If you’re planning on starting a company and don’t know where to start, contact doola today!

Pro Tip: If you’re inexperienced in starting a company, it is always a good idea to consult professionals for assistance.

Manager-Managed LLC

While we mentioned above that most LLC prefers a member-managed business structure, there are also situations when a manager-managed LLC is preferred. This happens when most members only want to be passive investors in the company. Passive investors do not wish to have a hand in running the day-to-day operation of the business but simply want to give out financial assets. If this is the case, LLC owners delegate or appoint management responsibilities to a member or a non-member.

Here are other examples of an LLC owner choosing to have their companies managed by a third-party manager. 

• The company has become too large, diverse, or complex to allow members to share management responsibility.
• When some or all of your members are not very skilled in business and people management. 
• When it’s a unanimous decision of the LLC members to hire a non-member to manage the LLC.

When Should You Select Manager-Management?

The most common structure for single and multi-member LLCs is usually member-managed. However, here are a few more reasons why LLCs choose to onboard a manager.

Passive investors

Investors want to play a part in your business financially but don’t want to do much with it. They are financial aids and passive investors because they have no interest in managing any of the company’s day-to-day.

Too many people

If your LLC’s headcount has become too big in number, being member-managed may become a little bit of a challenge in the sense that managing too many people by a few members can be very taxing and inefficient. Although there is no limitation in terms of headcount in an LLC, it is best advised that when you feel that you’ve reached a point where you think that you have grown too big in number, it may make sense to divide your LLC into smaller groups and have the sublets managed by a third-party manager. Sometimes, when an LLC has grown too large in number, the decision-making process among management can cause divisiveness. 

Skill challenge

Not all business owners can manage the business or have a hand in managing the operations. If this is the case, the business will be in better hands if the company is managed by someone highly skilled at managing the ins and outs of the business. 

Scaling

When handled correctly, businesses are always bound to scale and grow. Despite starting as a member-managed LLC, you can eventually venture into getting your LLC manager-managed as you continue to scale and expand. 

Multiple locations

If your LLC is in multiple locations, getting a manager to handle your daily operations makes sense. This will become more efficient in terms of cost and productivity in the long run. Having managers at each of your stores allows them to oversee operations and even help you boost sales as they can contribute ideas on making the business better in a specific location.

 

One-Person LLC: A Quick Overview

Many single-member LLCs will usually opt for member management. However, handling the day-to-day challenges of the business on your own can be a challenge and inefficient. Because of the need to multitask, the business owner tends to juggle all of the business’s needs, activities, finances, and operations and not focusing on one area. In this situation, it’s best to bring someone in from the outside to help you manage these tasks. These tasks can include maintaining documents, overseeing operations, making annual reports, finances, and many more. All these can be a real challenge for one person. 

Should You Document Your Choice?

If you decide to have your LLC member-managed, there is no need to document this in most states formally. However, some states require you to do so. Regardless of the case, all LLCs should always have a document stating their work operation, policies, and procedures. The document should include the manager’s responsibilities and rights of the members and managers, too.

If your LLC does not have an LLC operating agreement, you may find yourself in sticky situations in the long run. 

If you choose to be managed by a manager, chances are very high that you will be required to put this in writing. This should be stated in the LLC’s articles that you file with the state of your registration. Like we mentioned above, it is best that you also say and include the rights and responsibilities of managers and members. 

Are you getting your business LLC-ready?

Consult business experts to make sure that you choose what’s best for you so you can be well on your way to success!‍

Reach out to us, and we’ll make sure to guide you every step of the way! 

 

LLC Members vs. Managers FAQs

 

Are managers of an LLC liable?

The LLC manager has a fiduciary duty to the LLC and should serve and protect the company in its best interest. If there is a breach of this duty, there can be a liability. To make it easy, the manager is responsible for protecting the LLC and being loyal to its members and their co-managers.  

What are fiduciary duties?

When simply put, a fiduciary duty is placed upon an entity or an individual to exercise trust, loyalty, expertise, and discretion in their actions and decision-making on behalf of their client. A fiduciary duty is also defined as an agreement between two parties that obliges one to only involve themselves in efforts solely for the benefit and best interest of the other.

Do LLC members have fiduciary duties?

LLC Members who operate the business must practice responsibilities and obligations of trust, loyalty, and reasonable care to the non-managing members of the LLC. This, along with other duties, is highly suggested to be placed under the conditions of your agreement.

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