Manager Managed LLC: Comprehensive Guide to Setup and Benefits

While there are lots of different options for business entity types and structures, the LLC is a popular choice because of the flexibility it affords. An LLC is subject to state statute, which means that the exact options available could vary from one state to the next, but in most cases you’ve got the choice of being member managed vs manager managed.

This guide introduces the difference between a member managed and a manager managed LLC, including the set up process and which businesses the manager managed model might suit. We'll also talk about how Wise Business is a great option to help your small business grow overseas.

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What is a Manager Managed LLC?

An LLC is created under state statute - owners are called members¹. An LLC can have any number of members, and members can be individuals, other businesses, or foreign owned business entities.

The LLC business structure could suit companies from single entrepreneurs right through to large and complex corporations. Because this model can be used for small and large businesses alike, it makes sense that there are slightly different options in terms of the day to day management processes and decision making responsibilities.

The most common LLC model is member managed. This means that all members - owners and investors - have a role in managing the day to day running of the business. This structure works where a relatively small number of people want to combine capital, skills and resources to work together.

The manager managed LLC model works a little differently. Instead of all members having a say in the way the business runs, the manager managed LLC allows for one or more specific managers to take charge of decisions. The manager might be a member - but this isn’t essential. This model may suit LLCs where there are a very large number of investors or members, or where some investors can not or do not want to be part of the daily running of the business.

Benefits of a Manager Managed LLC

A manager managed LLC assigns management responsibility to specific managers, and builds in the option to have some members who do not take part in the day to day running of the business. This has a couple of immediate benefits - silent investors can put capital into the company without being required to run it, and members who do not have the skills needed to run the business can also be exempted from duties.

Having designated managers allows the business to pick the very best people for the job, rather than needing to involve all members. It also means that decision making can be assigned to an individual or a small group of individuals - streamlining processes and making it easier to make agile decisions.

Members in a manager managed LLC can still retain voting rights - this will be set out in your LLC operating agreement. This can mean that choosing a manager managed LLC vs a member managed LLC allows for a select group of individuals to take charge of the day to day management of the business, while the broader group of members still have authority over bigger decisions and strategy.

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How to Set Up a Manager Managed LLC

Let's look at how to set up a manager managed LLC. Bear in mind that as the LLC is set up under state statute, the exact process might be different from one place to another. Most states do not restrict LLC ownership, but some business types can not normally be formed as LLC, such as banks or insurance companies. Once you’ve checked that your specific business would be suitable as an LLC based on the local law in your state, these are the steps you’ll normally take:

1. Choose a Name for Your LLC

First up you need to pick a company name. Your state will have rules about how this works, which can usually include:

• Your LLC name must not be in use or reserved by another company
• Your LLC name must not be misleading or include prohibited words
• Your LLC name must include something to show the LLC status, such as ‘Limited Liability Company’, ‘LLC’, or ‘L.L.C.’

Once you’ve chosen your LLC name, you can normally apply to reserve it for a fixed period of time. A fee might apply but this will also mean that no other business can take that name while you’re completing the process of forming and registering your LLC.

2. Appoint Managers

As a manager manager LLC, you need managers. This can look very different from one LLC to another, based on needs. You might have one or more assigned managers, who may or may not be members. In most states there’s no restrictions on manager type, so you could have an individual, or a company - such as a company which specializes in supporting LLC management on an outsourced basis.

Think carefully about how you want the day to day management of your business to work at this stage. You’ll be able to set out the ins and outs of the processes you want to be in place, through your operating agreement - but these ways of working will also help to determine who is the right manager for your LLC.

3. File Articles of Organization

The next step is usually filing Articles of Organization with the Secretary of State wherever you're planning to operate. The process here is arranged at state level, so make sure you know what is required in your specific location.

4. Create an Operating Agreement

While you probably won’t have to file your operating agreement at a state level, it’s important to have a written agreement setting out how your LLC will work. The details of your operating agreement can vary depending on the business type and your unique needs, but having important issues set out in writing can help avoid issues or disagreements. There are templates available online which can help with drafting your operating agreement, but it may still be worth employing a consultant who is well versed in manager managed LLC operating agreements to help you.

5. Obtain an EIN (Employer Identification Number)

Assuming you have an SSN and your business will be located in the US, you should be able to apply for your EIN online through the IRS². You’ll need to complete an online application, and get verified. Once your application has been checked you’ll be issued with your EIN and the confirmation notice.

Manager Managed LLC Operating Agreement

It’s very important to have a written operating agreement for your manager-managed LLC. If you do not, the state’s LLC agreements would apply, which are likely to assume you have selected a member-managed structure. Setting out your operating agreement in writing before you start to trade also reduces the room for misunderstandings or disagreements once you start to work.

Your manager managed LLC agreement must specify that you have selected a manager managed entity model. It should also set out in detail what the responsibilities and scope of work look like for the managers of your LLC. Specific considerations include the amount of capital spend allowed before the manager should consult with other LLC members, responsibility for hiring decisions and other such important actions - as well as how the day to day running of the business should work.

The manager managed LLC agreement is a very important document. Getting it right can help save a lot of hassle down the line. This might mean that you want to get professional help when writing this agreement to make sure everything is covered. At the very least it is often worthwhile using a template for this document, which you can find online, to guide you as you write.

Responsibilities of Managers in a Manager Managed LLC

Your operating agreement is designed to set out the responsibilities of the managers in your manager managed lLC. The exact role you need your manager or managers to play can vary depending on your business needs.

Generally, managers will be responsible for day to day decision making, but you might want to put in place controls over which decisions should be referred to the wider membership for a vote. You may insist on member agreement to capital spend, when hiring or when signing certain contracts for example. You’ll have the freedom to set up your own responsibilities to suit the needs of your business and all its members.

Pros and Cons of a Manager Managed LLC

Pros

• Allows for investors who do not want to be part of the day to day running of the business
• Can be an effective way to use the skills and experience of members who are strong at management
• Reduces the number of people required to be involved in decision making
• You may be able to protect the privacy of members by listing the manager’s information only on public documents, rather than every single member

Cons

• Operating agreements are more complex than with a member-managed LLC
• You may need to pay the manager a specific salary, as they’ll be considered an employee rather than a member. This can become more complicated from the perspective of tax and running payroll
• Some members will be cut out of the decision making process

Conclusion

A manager managed LLC is a helpful business structure for businesses which want to attract silent partners and investors, or which have a large number of members. By appointing certain managers - who may or may not also be members - decision making can be centralized and made quicker. The LLC structure in general is flexible enough that you can build the business in the best way for you, depending on the type of work you do, the number of members you have and so on. Use this guide to start investigating your options, and take professional advice if you’re not sure of the best LLC structure for your own unique needs.

1. IRS - LLC
2. IRS - EIN