Manager-Managed LLC Or Member Managed LLC?

There are two kinds of LLC’s, one managed by all the members equally and those managed by one or more members or by some third party individual or business structure. The question you need to ask yourself when considering which structure is right for you is one of control.

Member-Managed LLCs

A member-managed LLC is operated equally by all of its members. That means that everyone is expected to share both in the business decisions and the day-to-day operations of the entity. If this does not work you have other options, for example you can select a group of members to become the managing members, and let those members manage by committee.

A member-managed LLC is a great choice if you’re a single owner business, and you don’t think you will ever have people come in as silent, non-participating members. It can also work for a multiple-owner business, again as long as everyone knows the tasks and is willing to participate equally, and you don’t anticipate bringing in non-participating investors.

A member-managed LLC is also a great choice for singles or couples who are using the structure for passive income activities, and who aren’t as concerned about the bigger picture aspects of the company. For a single person, with no children, there isn’t really a huge need to create a control transfer mechanism. And for couples, the member-managed entity allows for truly shared control between the spouses. If a spouse is injured or ill and unable to communicate, the other spouse can still continue the LLC’s business, so the business does not suffer due to the unforeseen consequences of what happened to one of the partners.

Manager-Managed LLCs

A manager-managed LLC is a two-level structure. One level provides the management for the LLC (hence the name managers) while the other level is made up of passive members. Essentially you’re creating a de facto limited partnership, without the liability that normally attaches to the general partner. You can have an unlimited amount manager, and they can be individuals or other business structures. It isn’t required that managers be members, although in most cases they will be.

It makes sense to operate as a manager-managed LLC if you have a situation where some members are not interested in the hands-on management of the structure, but prefer a background role. It’s also great for estate planning. By naming your kids as members, you can bring them into the LLC using IRS gifting allowances, while still retaining decisive control of the LLC.

Special Considerations for Real Estate Professionals

If you claim real estate professional classification on your tax return, you HAVE be an active participant in the management and operations of the LLC. That means you’ve got to be named as a manager. In a manager-managed LLC, the members who aren’t also managers are considered passive – just as they would be in a limited partnership. If you make a mistake with your planning here you could set easily yourself up for an IRS challenge.

On the other hand, you could set up your LLC as a member-managed LLC instead. That way, every member is considered to be actively participating. It’s a great way to strengthen everyone’s argument that they are entitled to deduct all of the available real estate losses.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

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