A limited liability company (LLC) is a distinct legal entity separate from its owners, who are known as members. This structure provides the members with a liability shield, protecting their personal assets from business debts and obligations. Establishing a management structure is a necessary function for any LLC, as the entity requires oversight to operate, make decisions, and interact with the outside world. The framework for this oversight is defined by state statutes and formalized in the LLC’s foundational documents.
Understanding the Two LLC Management Structures
LLCs generally choose between two primary management structures: member-managed or manager-managed. In most states, the default is member-managed, meaning all owners retain the authority to make operational decisions and legally bind the company. This structure functions similarly to a partnership, where every member is actively involved in the business’s day-to-day operations.
The alternative structure is a manager-managed LLC, which delegates operational control to one or more designated individuals. This election is specified in the LLC’s formation documents, typically the Articles of Organization filed with the state. The specifics of how the managers operate, their powers, and their relationship with the members are detailed in the Operating Agreement.
The term “LLC Manager” applies exclusively when the entity is formally structured as manager-managed. In this model, only the appointed managers possess the inherent authority to conduct the company’s ordinary business affairs and bind the LLC in contracts. The members retain their ownership interest but cede their operational authority to the designated manager or managers.
Defining the Role of an LLC Manager
The functional role of the LLC Manager is to handle the daily administration and strategic direction of the business. This includes overseeing all aspects of the company’s operations, such as managing inventory, directing sales efforts, and handling customer relations. The manager is also responsible for significant internal functions, including making financial transactions, managing the company’s bank accounts, and controlling the budget.
A manager’s duties extend to human resources, which encompasses hiring, firing, and supervising employees and contractors. They are the primary decision-maker for the company’s ongoing activities, ensuring that the business runs smoothly according to the strategic goals set by the members.
Who Can Serve as an LLC Manager
An LLC Manager is simply a role, and the individual filling that role does not have to be one of the owners or members of the LLC. The structure allows for a distinction between internal managers and external managers. An internal manager is a member of the LLC designated to take on the operational duties.
An external manager is a third party—an outside professional or entity—hired for their expertise to run the company. This appointment is common when members wish to remain passive investors or lack the necessary operational experience. The Operating Agreement outlines the Manager’s role, regardless of whether they are an owner or an outside hire.
Authority and Responsibilities of an LLC Manager
The authority of an LLC Manager is defined by the Operating Agreement and state law, granting them the power to legally bind the LLC in transactions. This means a manager can execute contracts, leases, and agreements on the company’s behalf, provided these actions fall within the scope of the business’s ordinary operations. Third parties transacting business with the LLC can rely on the manager’s representation of authority, unless they know the manager is acting outside their granted powers.
Beyond transactional authority, managers are held to standards of conduct known as fiduciary duties, similar to those imposed on corporate directors. These include the duty of loyalty and the duty of care, requiring the manager to act in the LLC’s best interest and refrain from grossly negligent or reckless conduct. The duty of loyalty prevents the manager from competing with the LLC or using company opportunities for personal gain. Many state statutes allow the Operating Agreement to modify or limit these fiduciary duties, though the duty of good faith and fair dealing is often considered an irreducible obligation.
How LLC Managers Are Appointed and Removed
The primary document governing the appointment, tenure, and removal of an LLC Manager is the Operating Agreement. This agreement sets forth the specific mechanism by which a manager is selected, often involving a majority vote or other defined consent threshold of the members. The Operating Agreement should define the manager’s term length, compensation structure, and any conditions for reappointment.
Clear documentation in the Operating Agreement prevents internal disputes and provides a roadmap for governance. The agreement must also specify the grounds and procedure for removal, such as for cause (e.g., breach of fiduciary duty or gross negligence) or without cause. Without these explicit terms, disagreements over management can become complex and costly to resolve.
Key Advantages of Using an LLC Manager
Structuring an LLC with a manager provides the advantage of separating ownership from control. This structure is useful for LLCs with a large number of owners or where members prefer to remain passive investors focused solely on financial returns. The manager structure allows these owners to invest without the burden of day-to-day operational responsibilities.
The appointment of a professional manager brings specialized expertise to the business, which is valuable when the members lack the necessary skills to run the enterprise effectively. Furthermore, the manager-managed structure streamlines the decision-making process by consolidating operational authority. This allows the company to execute strategy and respond to market changes faster than a member-managed LLC, which might require a vote from multiple owners for routine decisions.
Encouraging Legal Consultation
The LLC Manager is a designated role that fundamentally shifts operational control away from the members, providing structural flexibility and professional oversight. The full scope and limitations of this role are determined by the LLC’s Operating Agreement, which acts as the foundational contract among all parties. Given the variations in state statutes and the ability to customize duties, individuals forming or joining an LLC should consult legal counsel regarding state-specific regulations and the proper drafting of the Operating Agreement.