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Choosing between a member-managed and a manager-managed LLC is a pivotal decision in forming your business. In this blog post, we'll break down these structures, guiding you to make the choice that best aligns with your business's needs and objectives.
This read will highlight the benefits of a manager-managed LLC, the nuances of LLC taxation, and how your business size impacts your choice. You'll learn how expert assistance can ease these complexities, allowing you to focus on your core business. Continue reading to uncover insights that could transform your business's future.
What is a Manager-Managed LLC?
There are two management structures you can choose when forming an LLC: member-managed LLC or manager-managed LLC.
With a member-managed LLC, all members – or owners – equally participate in the daily operations of the company.
On the other hand, a manager-managed LLC enables only certain members or even third-party non-members to have the authority to operate the business. Unless your state has restrictions, a manager can be an entity such as a corporation or another LLC.
If you want your business to become a manager-managed LLC, you must explicitly state your selection in your operating agreement. Otherwise, the state will classify your business as a member-managed LLC by default.
Reasons for Choosing a Manager-Managed LLC.
Among small businesses, a member-managed LLC is a more popular choice over a manager-managed LLC. There are situations, though, where a manager-managed LLC may be more suitable. Two main reasons for forming a manager-managed LLC are:
Passive Members
Passive Members who lack management experience or wish to solely be an investor are considered passive members because they do not engage in day-to-day business duties. Since passive members are not a part of the decision-making process, they have less liability than active members. Therefore, if your business includes passive members, then choosing a managing member or third-party non-member to run the entity might be the best option.
Size of Your Business
If your business is too large or complex, sharing management responsibilities among all members can be impractical. By selecting one or more members or non-members to perform day-to-day operations, you can allow your business to run more efficiently. Also, this lets all members focus on their specific areas of expertise and the responsibilities that matter to them.
Manager-Managed LLC Taxes
Taxation for your business depends on how many members you have in your LLC.
If you operate a single-member LLC, then you are not required to file a separate tax return for your LLC. Instead, you report your business’ profits and pay taxes on your personal tax return, which is Form 1040 with Schedule C attached.
For a multi-member LLC, you must report your business’ income on Form 1065. Then, you and each member of your LLC need to fill out Schedule K-1, which reports each member’s share of income, losses, deductions, and credits. The amounts on Schedule K-1 are taxed and paid on each member’s personal tax return.
For both single-member and multi-member LLCs, you have the option to be taxed as a C corporation or S corporation. First, you must elect to be taxed as a corporation via Form 8832. Once you complete that form, you must report your income on Form 1120 or Form 1120S.
Managing members of your LLC are required to pay self-employment tax. However, passive members are not subject to this tax. This law is a bit complicated, but if you are an active member, you can expect to pay self-employment tax.
If you hire a non-member to manage your business, that person is considered an employee. This means payroll taxes must be withheld from his or her wage.
Work with the Experts
Choosing the right LLC structure is critical to your business's success. Understanding the complexities of member-managed and manager-managed LLCs, and how each can impact your business operationally and tax-wise, can feel overwhelming. Our business tax and entity formation services at 1-800Accountant are here to help you navigate these decisions. This ensures your business starts on a path to success. Let us handle the complexities, so you can focus on growing your business.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.