Get the Skinny on Manager-Member LLC

February 25, 2017
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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 the 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 MembersMember 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 BusinessIf 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 area of expertise and the responsibilities that matter to them.

Taxes for a Manager-Managed LLC.

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.

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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.