What Is the Difference Between a Member and a Manager?
What is the Difference Between a Member and a Manager?
A limited liability company (or LLC) is managed by members, managers, or a combination of members and managers. By default, we form most of our LLCs as member-managed. We find it to be the easiest method for managing your LLC and keeping it low-maintenance.
What is a Member?
The owners of an LLC are called “Members.” They provide the capital that the LLC uses to start the business. In a member-managed LLC, members by definition manage the business of the LLC. In a manager-managed LLC, members as a group often do not take an active role in running the business. Normally, one or two members will be intimately involved in the day-to-day operations of the LLC. The other members will be passive, non-active investors. Beyond electing the managers and voting on certain key events in the LLC’s life, the members of a manager-managed LLC entrust its management to the managers (much like the shareholders of a corporation entrust its management to the directors and officers of the corporation).
What is a Manager?
Managers are elected by the members. Initially, these individuals are specified in the operating agreement. After that, if the operating agreement so permits, members can hold annual or other regularly scheduled meetings to elect managers. Managers manage the business and affairs of the LLC and exercise the LLC’s powers. Managers can either perform these responsibilities themselves or delegate their performance to officers and employees under the managers.
In performing these responsibilities, the Act imposes on managers the same fiduciary duty with respect to the LLC and its members that a general partner owes to a general partnership and the other partners of that partnership. It is permissible to modify and otherwise refine the fiduciary duty of the manager in the operating agreement. Indeed, it is advisable to do so. Typically, the operating agreement will specify fiduciary duties, such as the “duty of loyalty” and the “duty of care,” for LLC managers.
What are Fiduciary Duties?
The duty of loyalty dictates that a manager must act in good faith and must not allow personal interests to prevail over the interests of the LLC and the LLC’s members. A standard example that raises these issues is a proposal that the LLC enters into a transaction that either benefits a manager or involves the manager in a conflict of interest with the LLC or its members. Such transactions are often called “self-dealing” transactions. They are not prohibited, but such transactions must be predicated upon (i) full disclosure, (ii) proper approval from disinterested managers and members, and (iii) fairness to the LLC and its members.
The duty of care requires a manager to be diligent and prudent in managing the LLC’s affairs. In corporate law, this is sometimes referred to as the “business judgment” rule. If a manager makes a decision, conscientiously and without fraud or conflict of interest, such a manager will not be second-guessed by courts based on how that decision happens to work out for the LLC. A manager is not held liable merely because a carefully made decision turns out badly.
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