Does it make sense for you to manage your LLC as a member or manager?

Carl Zoellner, Esq. explains the difference between member and manager-managed LLCs.

When you’re setting up an LLC, a key thing to consider Is whether to set it up as member-managed or manager-managed?

Starting with member-managed LLCs, certain states require you to designate whether they’re member-managed or manager-managed. In member-managed LLCs, it means all of the members of the LLCs are the manager. 

So the same folks who own the LLCs, which are the members, are all expected to have some sort of managerial discretion over the entity itself. Now, most commonly, I would use a member-managed LLC in a situation where I’m looking for the maximum level of anonymity in a type of investment, and usually, it’ll happen with passive investment. 

For my real estate investors out there, if I’m looking at having a rental property, normally I’m going to have an LLC in the state where that rental property is located. And that LLC in that particular state, is going to be listed as member-managed. Both that member and manager are going to be my Wyoming holding company or my Wyoming LLC because Wyoming offers the highest level of charging order protection, as well as allows you to file your business entities anonymously. 

By making that state-specific LLC, it’ll hold that rental property member-managed, the only position that links back outside of that state-specific LLC is now that Wyoming LLC. Now when we look at that Wyoming LLC, you go to the secretary of state website to pull it up. The only thing that shows up on the website as far as who has some sort of discretion on the entity isn’t you as an individual. 

The secretary of state listing is only gonna list the organizer of the business entity. Plus, if you set up your entity with Anderson Business Advisors, it’s going to be one of our employees who submitted the paperwork and organize the entity on your behalf in Wyoming. 

Now, on the manager-managed side, some of the members may be managers or it can also mean that an outside third-party can be a manager. That outside third-party could also be a business entity or it can be an individual. 

Where is it most common to use manager-managed LLCs? It’s important in a scenario where someone could have ease of access to see who has the capability to make decisions on behalf of the business entity. Oftentimes, if we’re looking at that, it’s an active type of investment where that LLC would be set up and you would have that manager-managed LLC individual listed as a manager or it could be a business entity. 

Now, if we’re looking at a flip project, or on a joint venture project, you could use a manager-managed LLC. That would be a multiple-member LLC. In that way, both you and your partner could show up as manager. If you need to sign documents or somebody wants some sort of verification, they could see that you two are the managers of that business. 

We’re not here, when we’re representing ourselves in our management capacity within our business, we’re not representing ourselves as individuals. When I’m representing myself as a manager, it means I have the ability to bind the business. However, it does not necessarily designate that I own or I’m a member of the LLC, which we want to keep that separation. 

In a member-managed LLC, if I was a member and the manager, so a member-managed setup, then I would be designating, if I signed as manager, that I’m also the member. So active businesses where we’re dealing with outside third parties tend to be manager-managed. And entities, where we’re trying to get the highest level of anonymity, are usually where we’re looking at member-managed because it will link back to our Wyoming holding LLC. 

The Takeaway

As always, if anybody has any questions and you are our client, you’re more than welcome to schedule a time with me or any of the other attorneys. 

I would also encourage everybody to continue to take advantage of our free content out there. 

We like to educate our clients so we can have productive conversations when we start looking at your particular situation.

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series.

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Got an idea for a future Coffee with Carl? Send it to Carl at cwc@andersonadvisors.com.