[leglock]

Need some help regarding LLC’s.

I understand they can be member or manager managed.

My question is if an LLC is manager managed, I presume it will still have members (please correct me if i am wrong).

If the members and managers are not the same individuals, are the members the principals of the LLC and managers just the individuals who have certain responsibilites outlined in the operating agreement but are not part of ownership?

Are the members the only ones who receive k1’s and not the managers?

What is the purpose of having a manager managed llc vs a member managed llc?

Thank you.

[taxgeek83]

My understanding is that member-managed LLCs are managed by the members in the aggregate – everyone has a say in operations. Manager-managed LLCs are managed by one or more members, while the rest of the members are just passive investors. When you have an LLC made up of a large number of investors, setting it up as a manager-managed LLC can alleviate a lot of the headache that comes with having too many cooks in the kitchen, so to speak.

Regardless, everyone has an ownership in the LLC, and everyone gets a K-1. The type of K-1 will depend on whether the LLC elects to be taxed as a partnership or an S corp (though in some cases it can be taxed as a C corp, and then presumably no one would get a K-1, because it would be taxed at the entity level).

[Kimboroni]

A manager-managed LLC could also designate a non-member to be a manager. The managers do not have to be members when it is manager-managed. (A member-managed LLC would not be able to do that.)

Only members get a K-1– parties who are only managers do not get K-1s.

AUD 84 (1/9/14-Wiley books/TB + free materials)
FAR 83 (5/21/14-the above + NINJA 10 Pt Combo Lite)
REG 84 (7/9/14-Wiley books/TB + NINJA Audio/FC/Notes)
BEC 76 (10/5/14-Wiley books/TB + NINJA Audio/FC)

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[taxgeek83]

@Kim – Good distinction! I didn't even think about that – I'm just used to working with the tax side of LLCs, and so I don't really pay too much attention to the business side. 🙂

[leglock]

Because members can hire anyone to manage operations, what is the purpose of haveing the separate category of manager managed llc.

I presume there is some legal or tax reason for member managed vs manager managed but im not understanding it.

[taxgeek83]

In a member-managed LLC, every member gets a say in operations. If you have two or three members, every member gets a say. If you have 60 or 70 members, every member gets a say.

By setting up a manager-managed LLC, only a handful of people get a say in operations. Everyone else is a passive investor. So whether the managers are outside folks, or members of the LLC, you only have a few people making decisions rather than 60 or 70 people making decisions.

Does that make sense?

[Kimboroni]

Just to add to that, it's a legal distinction that you set out at the time of filing the articles of organization with the state. Part of the purpose is that it deals with matters of agency. For instance, if you are a member of a member-managed LLC, you can always act as an agent for the LLC. However, if you are a member of a manager-managed LLC, you also have to be a manager in order to have any position of agency.

The lawyer I work with (part of my job is supporting a corporate attorney) prefers to set up manager-managed LLCs, I think because it gives them more flexibility to do whatever they want with the manager positions at any point in time. But overall, member-managed seems to be more common. Often you just have a few people who want to be both the members and the decision makers, so either one works just fine.

AUD 84 (1/9/14-Wiley books/TB + free materials)
FAR 83 (5/21/14-the above + NINJA 10 Pt Combo Lite)
REG 84 (7/9/14-Wiley books/TB + NINJA Audio/FC/Notes)
BEC 76 (10/5/14-Wiley books/TB + NINJA Audio/FC)

Disclaimer: My ninja avatar is not meant to imply that I have any affiliation with this site other than being a forum member. That's a pic of a T-shirt that my daughter gave me for my birthday. 🙂

[leglock]

If you are a member of a manager managed llc, would the fact it's manager managed turn it into a passive investment if, as a member you are not also a manager? or can you be a member non manager and still perform duties such that it is not passive?

[Kimboroni]

“If you are a member of a manager managed llc, would the fact it's manager managed turn it into a passive investment if, as a member you are not also a manager?”

That's correct– if you are a member but not a manager of a manager-managed LLC, it is supposed to be a passive investment.

“or can you be a member non manager and still perform duties such that it is not passive?”

No, you shouldn't have any rights to perform duties if you a member but not a manager of a manager-managed LLC. It should all be spelled out in the LLC's operating agreement, if good legal counsel was used.

AUD 84 (1/9/14-Wiley books/TB + free materials)
FAR 83 (5/21/14-the above + NINJA 10 Pt Combo Lite)
REG 84 (7/9/14-Wiley books/TB + NINJA Audio/FC/Notes)
BEC 76 (10/5/14-Wiley books/TB + NINJA Audio/FC)

Disclaimer: My ninja avatar is not meant to imply that I have any affiliation with this site other than being a forum member. That's a pic of a T-shirt that my daughter gave me for my birthday. 🙂

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