LLC Members and Managers: Who Are LLC Owners?

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Who owns and manages an LLC? If you’re thinking about setting up a Limited Liability Company (LLC), it’s helpful to understand the roles of LLC owners and how they’re involved in managing the business. LLCs offer the flexibility to create unique management structures, pick officer titles, distribute management responsibilities, and outline ownership interest.

In this article, we discuss common management and ownership structures for LLCs and explore the roles of LLC Members and Managers.

 

LLC Members: Who Owns an LLC?

The ownership of an LLC lies with its Members, who share the ownership interest in the company. The LLC Operating Agreement acts as a contract between LLC Members, outlining the rules and responsibilities for running the company. This agreement covers several crucial aspects that define the Members’ roles and their relationship with the company.

An LLC Operating Agreement should include:

• Ownership interest of each LLC Member
• Voting rights of each LLC Member
• Shares in profits and losses for LLC Members
• Arrangements for making distributions
• Management responsibilities (if any) of LLC Members

LLC Members: A Look at Ownership Structures

At a minimum, an LLC needs one Member, known as a “single-member LLC.” For this kind of LLC, the Operating Agreement says that the sole LLC Member owns and controls everything.

LLC Members can adopt various ownership structures, and the Operating Agreement allows them to be pretty flexible when it comes to naming LLC Members. For instance, one LLC could be the single-member of another LLC (often called a “subsidiary”) as part of a holding company structure. In this case, the holding company makes decisions for the subsidiary.

Other ownership structures involving LLC Members include:

• Two or more LLC Members owning a family business
• Two or more unrelated parties starting a business venture as LLC Members
• A single-purpose managing LLC Member with one or more other LLC Members

LLCs can create different classes of LLC Members in the Operating Agreement, with different voting rights based on factors like total ownership interest, capital contributions, or management responsibilities.

LLC Members vs. LLC Managers

It’s important to know the difference between “LLC Member” and “Manager” in an LLC. A “Manager” handles the company’s daily operations but usually isn’t part of the ownership structure or involved in significant company decisions involving LLC Members.

LLC Management Structures

When it comes to LLC Members, LLCs usually fall into one of two categories: Manager-Managed or Member-Managed.

     1.) What is a Manager-Managed LLC?

In a Manager-Managed LLC, LLC Members delegate day-to-day operations to a third-party manager, often an experienced, paid professional. The Operating Agreement outlines the manager’s authority and the rights kept by LLC Members.

     2.) What is a Member-Managed LLC?

In a Member-Managed LLC, the LLC Members also take on the role of Managers. They have ownership interest and manage the daily activities of the LLC.

How to Become an LLC Member

To become an LLC Member, existing LLC Members need to hold a vote on whether to admit the new member. If the new member is approved, an Amended and Restated LLC Operating Agreement must be drafted, which includes the new Member and details their ownership percentage. This ensures that the new Member’s role and responsibilities within the company are clearly defined and agreed upon by all existing LLC Members.

LLC Members: Is There a Maximum Number?

While there’s no limit to the number of LLC Members an LLC can have, it’s generally a good idea to keep the number as low as possible to avoid conflicts among LLC Members.

LLC Members: Is There A Minimum Number?

An LLC needs to have at least one Member or owner. LLCs with only one Member are referred to as “Single-Member LLCs”. The sole Member of a Single-Member LLC is both the owner and the Manager of the LLC.

What Titles do LLC Members Have?

LLCs can choose any officer titles they want. Common positions held by LLC Members in an LLC are President, Secretary, and Treasurer.

Do LLCs Have Directors?

LLCs can adopt management structures from corporate organizations, like establishing a “Board of Directors” or “Board of Managers” responsible for appointing officers. This structure can work well for family-owned businesses where siblings want to control the company by majority director vote.

Does an LLC Have a President?

Yes, an LLC can have a President, which is a popular title for the highest-ranking manager and often held by one of the LLC Members.

Does an LLC Have a CEO?

An LLC can also have a CEO. LLC Members can assign any titles they prefer to Managers or Managing-Members. While “President” is the most popular title for an LLC’s top manager, “CEO” is another option that can be held by an LLC Member if they wish.

Understanding the roles and responsibilities of LLC Members is crucial when setting up an LLC. By thoughtfully structuring the LLC’s management, ownership, and decision-making processes, business owners can create a flexible and efficient organization that caters to their specific needs. With a good understanding of the functions and limitations of LLC Members, you’ll be well-prepared to make informed decisions when forming your LLC.

Do I Need an LLC List of Partners?

No. Instead of having a list of partners, a multimember LLC would have an operating agreement naming its owners. Usually the ownership in an LLC is set forth in percentage ownership or units and those owners are called members. Governing documents should not refer to the LLC owners as partners, unless it is in the context of partnership taxation under subchapter K. For example, an LLC should designate a partnership representative who would be responsible for all dealings between the LLC and the IRS. That partnership representative does not even need to be an owner. The LLC is a contractual entity with an operating agreement that sets forth the ownership and management. Thus an LLC Agreement would list the members, but there is no separate official list of owners.

What is an LLC Membership?

An LLC membership refers to the ownership interest in an LLC. Members are the individuals or entities that own a portion of the LLC, similar to how shareholders who own stock in a corporation. Membership gives individuals or entities certain rights and responsibilities, depending on the LLC’s operating agreement and the specific state laws governing the LLC. Membership can be divided into percentage ownership or units of ownership, depending on how the operating agreement is written. It can also have multiple classes of membership interests, such as voting and non-voting. Membership is a hybrid concept that has some attributes of stock ownership and other aspects like a partner in a partnership.

Note that your LLC operating agreement membership interests typically do not name who inherits your interest upon your death. Instead that is typically handled through estate planning documents. It is possible to have a “transfer on death” provision added to your membership interest, but it is generally better to do that in other estate planning documents.

Also your membership interest rights and responsibilities are derived directly from what is written in the operating agreement, which can override the Delaware LLC Act, because LLC’s are “creatures of contract” more so than corporations, where stockholder rights are largely derived from statutory language.

Because your LLC Membership interest is derived from contractual rights, the interest is not usually “certificated” in the form of a membership certificate. To transfer your LLC membership interest to another person, trust or entity usually requires the consent of other members, under a principle of “pick your partner.”

Key Points About LLC Membership:

Who Can Be a Member?

• Individuals: A natural person can be a member of an LLC.
• Trusts: Often for estate planning reasons, your revocable trust may be named the members of an LLC to help avoid probate.
• Entities: Corporations, other LLCs, or trusts can also be members.
• Single-member LLC: An LLC can have just one member, which is called a “single-member LLC.”
• Multi-member LLC: An LLC can have multiple members, each of whom holds a share of the ownership.
• LLCs can be managed directly by its members, similar to a partnership. Or an LLC can be managed by a third party manager, known as manager managed. Often in Delaware the LLC has some hybrid of the two where some decisions are retained by the members, like deciding to sell substantially all of the company assets or deciding to replace the manager. Then the manager can be just delegated the day-to-day management responsibilities.

The LLC Operating Agreement sets forth the rights, responsibilities, and relationships between the owners and managers. This document outlines how the LLC is run, including:

• How profits and losses are divided.
• How decisions are made.
• The procedures for adding or removing members.
• The value of the LLC for buy-out purposes.
• Rights of first refusal before an interest is assigned to a third party outsider.
• How to replace managers and their powers and duties.
• Waiver of fiduciary duties.
• The process for dissolving the LLC.