Limited liability companies are typically run by a sole member or some or all of its members. However, sometimes it is best for a limited liability company (LLC) to be managed by a third party nonmember manager. Keep reading to learn how to advise your business-owning clients about when to consider using a nonmember manager.
What Is a Nonmember Manager?
A nonmember manager (NMM) is an individual or corporate entity that is not a member of the LLC that it manages. An NMM is usually appointed in one of two ways: it can be elected by the members of the LLC or appointed by the LLC’s operating agreement.
Once installed in office, the NMM can carry out a variety of day-to-day operational tasks for the LLC, including the following:
- Management advice
- Executing contracts
- Financial services
- Information technology
- Human resources
- Regulatory compliance
- Administrative tasks
When Should an LLC Consider a Nonmember Manager?
An NMM can be employed when a company needs the expertise of a third party to manage the business. This strategy is also useful in cases involving interrelated businesses, such as those involving a parent company or holding company and its affiliates. A combination of members and nonmembers could also run an LLC.
The following situations are ideal for using an NMM to manage an LLC:
- To consolidate administrative powers
- When investors require one
- When investors want to remain passive
- When preparing to transition the business to a family member or employee
- When the business needs the specific expertise of the NMM
- To conduct a trial run to see if the NMM is a good fit for the business
- When the owner of a single-member LLC dies or becomes incapacitated
Some states require that an LLC specify whether it will be managed by its members or a nonmember in its articles of organization. This document should be as specific as possible, because any gaps could be filled by the state’s default rules for LLCs.
Who Should Be the Nonmember Manager of an LLC?
The NMM is usually a separate company, not an individual, whose specific mission is to provide management services. The company employs workers to perform the operating tasks of the LLC. These tasks can include business operations, marketing, and human resources.
Parent companies often act as the NMM of their subsidiaries, which allows the parent company to simplify its management structure. Another advantage is that a parent company can easily move its management personnel in and out of the NMM entity without having to name a new LLC manager each time.
Owners of an LLC can also manage the company through an S corporation that serves as an NMM. This can help the small business minimize self-employment taxes, as the managing members will also own the S corporation and take W-2 salaries through it rather than through the LLC.
Where Can an LLC Use a Nonmember Manager?
An LLC must sometimes maintain licenses, authorizations, or permits in the name of an individual or responsible party. Its management agreement should address the NMM’s assignment obligations and responsibilities to maintain licenses for the business to operate effectively. This would prevent a situation in which an individual who holds a general contractor license leaves the company, for example, putting the company in the position of operating without a license. A similar problem would occur if the NMM allows the license to expire. Because the NMM has an independent contractor relationship with the LLC, a separate management agreement can be drafted to enumerate these responsibilities.
Why Should an LLC Use a Nonmember Manager?
A primary benefit of using an NMM is the ability to deduct the manager’s compensation as an expense of the LLC. This practice can reduce the business’s taxable income and provide the LLC members with an additional barrier against personal liability claims. Small businesses can benefit from the minimization of self-employment taxes. When an LLC includes several members, the managing member is taxed differently than the nonmanaging members.
Is a Nonmember Manager Right for Your Client’s LLC?
While an NMM can provide several advantages, it may not always be the best option. Every client’s business is different. However, the more you know about the advantages and drawbacks of NMMs, the better you can advise your clients on all of the available options.
WealthCounsel’s Business Docx® software provides several options to establish the relationship between an LLC and its NMM, including a Management Agreement and provisions in the LLC Operating Agreement that allow the manager to be an entity rather than an individual. Click here to learn more about Business Docx.