Manager-Managed LLCs: What Are They?

 Posted on January 30, 2023 in Business Law

What is an LLC?

An LLC is a company that combines the personal asset protection of a corporation with the tax advantages of a partnership. Its members own an LLC (think shareholders in a corporation), and LLCs may be Member-managed or manager-managed. In a Member-managed LLC, the Members (or owners) of the company control the day-to-day activities of the company. 

Manager-Managed LLCs in Illinois

According to 805 ILCS 180/15-1, an LLC is Member-managed unless the Articles of Organization or Operating Agreement specifically state otherwise. Therefore, if an individual or member wants to create a manager-managed LLC, they must state their management preference in their Operating Agreement. At Gateville Law Firm, we are Kendall County LLC Attorneys for start-up companies and established business enterprises.

Members of an LLC

One of the most critical questions when forming an LLC is whether to set-up the LLC as a manager-managed or Member-managed LLC. In the context of LLCs, managers and members are vastly different and play different roles in the LLC. A Member holds a Membership interest in the LLC. Another word for “Member” in the context of an LLC is an “owner.” The members of an LLC are like shareholders in a corporation. Members of an LLC own the equity of the LLC but may or may not play a management role in the business. The members may be passive owners meaning that employees and managers get paid to run the day-to-day operations of the LLC. The LLC members are disclosed at the "Articles of Organization formation phase."  The Articles of Organization is the term called by the Secretary of State when one incorporates an LLC. Generally, the LLC Operating Agreement requires members to ratify new members and managers. 

Members of a company hold certain financial rights, such as the right to share in profits and losses and to receive distributions. In addition to these economic rights, members also can participate in the business as an employee. An member-managed LLC is an LLC where the members run the day to day operations of the LLC. In Member-managed LLCs, the Members have the authority to sign documents and act on behalf of the LLC. Member-managed LLCs are run by the members of the LLC.

Managers of LLCs are different than Members. In a manager-managed LLC, the members elect an individual, group, or entity to run the business's day-to-day operations. Managers can be one or more current Members or a third party. Likewise, third-party managers can be individuals, groups, or even another LLC. 

Managers of an LLC

Manager-Managed LLCs are recommended for multi-member LLCs. There are a multiple ways to appoint a manager. The LLC Operating Agreement generally describes how the managers are appointed and the powers of the managers. For example, you and two of your best friends are starting a restaurant and decide to create a manager-managed LLC. Both of your friends are elementary school teachers, but you are a restaurant manager with 25 years of experience. The two friends might relinquish their managerial duties to you and make you the manager of the LLC while they remain passive Members. The LLC allows you to sign documents, take out loans, and control the daily activities of the LLC. An manager-managed LLC gives managers the authority to operate the daily business decision-making without seeking approval from the members. The members generally will approve the major decisions such as purchasing a business, entering into a big commercial lease, or selling real estate.  The manager-managed LLC allows members to start the LLC and hire someone with more experience in the field to run the daily activities of the business. However, the members still control the company and have voting rights typically used for significant financial decisions rather than running the daily operations. 

Operating Agreement in a Manager-Managed LLC

The LLCs Operating Agreement should contain information regarding the roles and responsibilities of the managers and their authority. The Operating Agreement should also include provisions for replacing managers, voting rights, and the process for selecting new managers. A well-written Operating Agreement allows for a smooth transition of power and clarity.

Manager Duties in a Manager-Managed LLC

The manager is responsible for the day-to-day activities. The manager has fiduciary duties to the other Members of the LLC. A fiduciary duty is a legal obligation requiring managers to act in the best interests of members of the LLC. In context of an LLC, the managers have a fiduciary duty to the members to act in their best interests when making business decisions and managing the company. This includes the following:

• Duty of loyalty, which means that they must be loyal to the LLC.

• Duty of confidentiality

• Must act in good faith.

• Use reasonable care and skill in managing the LLC

Fiduciary duty is a duty of trust. Trust is essential and the law requires the managers to maintain a duty of care and the duty of loyalty. A breach of duty can lead to a lawsuit between the members and managers. A manager’s fiduciary duty of care requires managers and members to act in good faith and exercise reasonable care in their obligations to the LLC. 

Under the business judgment rule, a person is not typically liable for business transactions made in good faith and with reasonable care that adversely impact the LLC. As long as the manager is acting in what she believes to be the company's best interest, they will not be held responsible for business decisions that turn out to be against the company's interests. 

The fiduciary duty of loyalty means that the member or manager is supposed to put the success of the LLC above any personal or individual advantages. In showing commitment to the LLC, the member or manager must act honestly in all dealings with the LLC and avoid conflicts of interest between their personal and LLC goals. 

Benefits of starting a manager-managed LLC

The main benefit of a manager-managed LLC is to give the authority of the members to the managers, who then become agents of the company. A manager may be a member of the organization but does not have to be. In Illinois, a manager may be another LLC or a corporation. Another benefit for members to create a manager-managed LLC is to become a passive investors. Passive Members have less day-to-day responsibility and may appoint want someone with experience and time to manage the activities of the LLC. In addition, inactive Members share in the earnings of the LLC based on their ownership percentage.

If the LLC is multi-membered, it may make sense to hire one or multiple managers to run the company. But, again, this may be easier than getting Members together frequently to vote on issues and find solutions to problems. 

If you are reading this article and want to limit your responsibility in an LLC, or there is someone better suiting to run the business, a manager-managed LLC is a way to go. At Gateville Law Firm, we are Yorkville LLC Attorneys that assist start up companies, established companies, and professional service entities with their business and legal structure.

This article is not meant to be legal advice. For legal advice, contact attorney Sean Robertson at 630-864-5788 for a consultation.