Choosing between a member-managed vs. manager-managed LLC comes down to who you want running the business day to day: in a member-managed LLC every owner has authority to operate the company, while in a manager-managed LLC the members appoint one or more managers (who don’t have to be owners) to handle operations. If your formation paperwork is silent, most states treat the LLC as member-managed by default. The structure you pick affects who can sign contracts on the company’s behalf, who owes fiduciary duties, and in some cases how much self-employment tax the owners pay.
How Each Structure Works
In a member-managed LLC, every owner has equal authority to run the business. Any member can negotiate deals, sign contracts, hire employees, and make purchasing decisions without first getting approval from the others. Under the Revised Uniform Limited Liability Company Act (RULLCA), which a majority of states have adopted in some form, each member has equal management rights regardless of how much capital they contributed. Ordinary business decisions pass by majority vote. Actions outside the ordinary course, like selling substantially all of the company’s assets or approving a merger, require unanimous consent.
A manager-managed LLC separates ownership from operations. The members vote to appoint one or more managers, and those managers take over the routine calls: signing contracts, managing employees, handling vendor relationships. Managers don’t have to be members. You can hire an outside professional for their expertise. Members give up authority over daily decisions but keep control over the structural ones. Under RULLCA defaults, selling off substantially all property, approving a merger or conversion, taking action outside the ordinary course, and amending the operating agreement all still require unanimous member consent.
Where there are multiple managers, decisions among them run by majority vote. A manager stays in the role until the members choose a successor or until the operating agreement sets a different term. These voting thresholds are all defaults; your operating agreement can adjust them.
Who Can Legally Bind the Company
The management structure directly controls who can commit the LLC when dealing with outsiders, and this is where the real-world stakes get high. Under older LLC statutes, every member in a member-managed LLC had statutory apparent authority to bind the company. RULLCA took a different approach: a member is not an agent of the LLC solely by reason of being a member. The law relies on general agency principles instead, and LLCs can file a statement of authority identifying which individuals can execute documents on the company’s behalf.
In practice, third parties dealing with a member-managed LLC often reasonably assume any member can commit the company. If your LLC never told a vendor that Member A lacks authority to sign contracts, and Member A signs one anyway, the LLC may be stuck with that contract under apparent authority principles. Courts look at whether the LLC’s own actions or inaction gave the third party a reasonable basis to believe the member had authority.
This risk shrinks in a manager-managed LLC because outsiders generally cannot assume a random member has signing authority. The authority lives with the designated manager. Apparent authority still has limits in either structure, though. No member or manager has inherent authority for extraordinary transactions like selling off the company’s primary operating assets. If a deal falls outside what you’d expect in the normal course of that business, the other side should be asking for documentation of actual authority.
If your LLC includes members who shouldn’t be making binding commitments, a manager-managed structure is the cleaner fix. Filing a statement of authority (where your state allows it) adds another layer of protection by putting the world on notice about who can and can’t act for the company.
Who Owes Fiduciary Duties
Whoever holds management power owes fiduciary duties to the company and its members. In a member-managed LLC, every member owes these duties. In a manager-managed LLC, the duties fall on the managers; members generally owe no fiduciary duties to each other solely because they’re members.
Two duties sit at the core. The duty of loyalty means the person managing must put the LLC’s interests above their own: no self-dealing, no siphoning off business opportunities that belong to the company, no competing with the LLC. The duty of care means the person managing must make reasonably informed decisions and avoid grossly negligent or reckless conduct. It is not a standard of perfection. Bad business decisions are protected as long as the decision-maker acted in good faith and did their homework. An implied obligation of good faith and fair dealing also runs through every LLC relationship, and that one cannot be eliminated by contract in any state.
Operating agreements can modify fiduciary duties within limits. Under RULLCA’s framework, the duty of loyalty cannot be eliminated entirely, but the agreement can identify specific categories of conduct that won’t violate it, as long as those carve-outs aren’t manifestly unreasonable. The duty of care can be reduced, but not unreasonably so. If your operating agreement is silent, the full default duties apply.
Which Structure Fits Your LLC
The choice comes down to how many owners you have, how involved they want to be, and whether any of them are purely passive investors.
Member-managed tends to be the better fit when:
- The LLC has a small number of members who all want to help run the business.
- Every member understands the industry and can make informed operational decisions.
- The business is straightforward enough that shared authority won’t create bottlenecks.
Manager-managed tends to be the better fit when:
- Some members are passive investors who don’t want involvement in daily operations.
- The LLC has many members, making consensus on routine decisions impractical.
- The business needs professional management expertise the members don’t have.
- You want to clearly limit who can bind the company in dealings with third parties.
Single-member LLCs are almost always member-managed by default, since the sole owner is the only person running the business. A single-member LLC can technically elect manager management if the owner wants to appoint someone else to run operations, but this is uncommon.
Self-Employment Tax Consequences
Your management structure can ripple into how much self-employment tax the owners pay. Under federal tax law, a limited partner’s share of partnership income is generally excluded from self-employment tax, except for guaranteed payments received for services performed for the partnership.1Office of the Law Revision Counsel. 26 USC 1402 – Definitions
The question for LLC members is whether a non-managing member in a manager-managed LLC qualifies as a “limited partner” for this purpose. The IRS has never issued final regulations answering that question. Proposed regulations from 1997 remain in limbo. In January 2026, the Fifth Circuit Court of Appeals ruled in Sirius Solutions v. Commissioner that limited liability under state law is enough to qualify someone as a limited partner for self-employment tax purposes, without examining their actual role in the business. That ruling only binds taxpayers in Texas, Louisiana, and Mississippi.
Outside the Fifth Circuit, the IRS continues to apply a facts-and-circumstances test, looking at whether the member had authority to contract for the LLC or participated in its business for more than 500 hours during the year. Under that approach, being in a manager-managed LLC and staying genuinely passive strengthens the argument that your distributive share isn’t subject to self-employment tax. Being in a member-managed LLC, where you legally have authority over operations, makes that argument much harder to win. The law here is genuinely unsettled, and the amounts can be substantial, so talk to a tax professional who knows your jurisdiction before relying on the structure for tax planning.
Locking the Choice In and Changing It Later
Most states ask you to declare your management structure in the articles of organization (called a certificate of formation in some states) when you file to create the LLC. If you leave that blank or your state’s form doesn’t ask, the default is member-managed. State the choice explicitly in both the articles of organization and the operating agreement so there’s no argument later about what you intended. The operating agreement is a binding contract among the members and governs the LLC’s internal affairs ahead of the state’s default rules, but it isn’t filed with the state and isn’t public.2U.S. Small Business Administration. Basic Information About Operating Agreements
Your initial choice isn’t permanent. You can switch later if circumstances change. The internal step is amending your operating agreement, which typically requires consent from all existing members because it’s a fundamental governance change, unless the current agreement sets a different threshold. The external step is filing an amendment to your articles of organization with the state, since most states require the formation documents to reflect which structure the LLC uses. Amendment filing fees are generally modest, often in the $25 to $100 range depending on the state, and expedited processing is usually available for an added fee.
Don’t skip the state filing when you switch. If your articles say member-managed but your operating agreement says manager-managed, you’ve created confusion about who actually has authority to bind the company. Third parties, banks, and courts will look at the public record. Keep both documents saying the same thing.