Creating a Manager-Managed LLC Operating Agreement

What is a manager-managed LLC operating agreement?

Every limited liability company has one of two management structures: member-managed or manager-managed. In a member-managed LLC, the members (also called the owners) run the LLC and its day-to-day affairs. But a manager-managed limited liability company hires or appoints individuals to run the LLC.

Both management types of LLCs need an operating agreement. An operating agreement acts like a constitution for an LLC; it’s an internal legal form that very clearly defines how the business will function. Often, the operating agreement for a manager-managed LLC is a little more complicated than other types of LLCs. That’s why it’s helpful to know how to create your operating agreement.

What elements should I include when I write my manager-managed operating agreement?

A manager-managed LLC operating agreement will include almost all of the basic elements required for any limited liability company. But it will also add in provisions for how your members and managers will cooperate over the long term, how each group will be paid, and more.

Since a manager-managed LLC operating agreement protects the interests of multiple distinct parties, it’s a bit more complicated than a standard agreement. Many entrepreneurs enlist the help of a business attorney to help hammer out the specifics. Our operating agreement template can also help you get started.

Everyone’s agreement will look a bit different, but let’s cover some of the essential elements to include.

1. LLC Name and Information

The first section should list the LLC’s business name. You’ll also want to include other basic information included in your Articles of Organization, like your current agent for service of process (usually known as a registered agent) and registered office, principal office address, business duration, and so on. It’s also a good idea to make a basic statement about your business purpose.

2. Member Information and Ownership Stakes

Who are the members of the LLC? Your operating agreement should briefly describe the names and addresses of each member. You’ll also want to include what percentage of the business each person owns. If members will be making any capital contributions, you’ll want to list those plus any terms or conditions for those additional contributions.

If you will have any non-managing members and managing members, this is an appropriate place to make that distinction.

3. Manager Information

Next you’ll want to list each manager’s basic information. This section should detail who the managers are and if there are any required qualifications for a manager. If you’ll have a chief executive manager and other managers under them, this is also an appropriate time to describe that structure.

4. Delineation of Member and Management Responsibilities

Your operating agreement should clearly define what the responsibilities of the members and managers are. In many manager-managed LLCs, the appointed managers handle most of the day-to-day operations. But it’s important to clarify when the managers’ responsibilities end and the members’ begin.

Generally, you’ll want to define which business choices are management decisions and which will be member decisions. Coming to a mutual agreement for these roles and responsibilities will help eliminate hassles down the road.

5. Procedure for Changing Managers

It’s quite likely that somewhere down the road, your LLC will have to add or subtract managers. But you’ll want to define what circumstances will require that change. For a lot of LLCs, the members appoint a new manager, but some LLCs let might let the other managers have a say in this decision. Maybe you’ll also place a limit on how many managers the business can have.

The important thing is that you clearly define these procedures so any transitions can function as smoothly as possible.

6. Procedure for Changing Members

On a similar note, you’ll want to set out how members can be added or removed from the LLC. Typically, this section will also include what might be the cause for forcibly removing a member. It’ll also detail what happens if someone turns in a statement of resignation.

For manager-managed LLCs, this section can be a little more complicated because the member being removed or replaced might also be a manager. You’ll want to make provisions for that possibility.

7. Accounting Methods

Typically, a manager-managed LLC has the managers handle the financial accounting for the business, but the operating agreement should confirm or change that. You’ll also want to describe what method of accounting you’ll use to track your business income and expenses. This will keep all your financial records on the same page.

You’ll also want to decide how your business will be treated for tax purposes. 

8. Distributions of Profits and Losses

Every LLC distributes its business profits to its members. But there are lots of specifics to hash out: how much profit each member receives, how often profits are distributed, and what happens if there was a loss over a given period. Some LLCs set frequent intervals for distributions, and others choose to distribute once or twice a year. Some manager-managed LLCs even decide to let the managers decide when it’s appropriate to distribute profits.

There’s no right or wrong approach, but you’ll want to set this up from the start, especially for each member’s individual income tax reporting purposes.

9. Compensation for Managers

What will be the dollar amount on your management contracts? Your managers will work hard to make your business succeed, and they deserve to be paid for their services. Your operating agreement should somehow detail how managers will be paid. Maybe you’ll pay a set salary that adjusts for inflation. Or perhaps you’ll give your member who’s acting as a manager a larger distributive share.

Remember that, unless your LLC is being taxed as an S corporation or C corporation, the members themselves can’t be employed by the LLC. So, a member who’s also serving as a manager can’t be paid a salary like an employee.

You’ll want to agree from the outset how you’ll pay your managers reasonable compensation for their time and expertise. 

10. Dissolution

When you’re just starting out, the last thing you want to think about is closing your business. But deciding how and why your business can close facilitates the process if you ever have to dissolve. For example, you’ll want to explain how many votes are necessary to approve a vote for dissolution and how many members you have to be present. You might also designate a specific member to file a Certificate of Dissolution.

11. Liability Disclaimer

Typically, in a manager-managed LLC, the managers don’t have personal liability for any debts or lawsuits served on the business. The LLC itself still pays its own debts and fees. But the operating agreement should state this clearly if you intend for your managers to be protected like the members.

Some LLCs also choose to integrate an indemnification provision. That’s just a fancy way of saying that the LLC agrees to pay any out-of-pocket expenses that they incur while conducting business activities.

12. Whatever Else Your Business Needs

Every LLC looks a little bit different, and every business’s operating agreement will vary. If you feel that you need any extra provisions in your agreement, then you can add them in. The operating agreement is an internal legal document, so it needs to meet your unique needs.