LLC Compensation: Member-managed vs. Manager-managed LLCs
As previously stated, the member-managed LLC is managed by the members of the LLC. A manager-managed LLC is managed by professional managers hired by the members. In some case, the professional managers will also be members of the LLC. The differences between these two management organizations go further than who is in control; it also includes differences in compensation method and taxes. In a member-managed LLC, each member is entitled to receive a share of profits, which are taxed as self-employment income. The members do not receive a salary in exchange for their services. In a manager-managed LLC, the managers receive a salary for their services to the LLC – unless they are owners. In that case, they receive a set distribution. In either event, the members share in the profits of the LLC, which may be treated as passive income (unearned income) to the members who are not managers. This will only be the case if the LLC members are truly passive investors in the entity and do “materially participate” in the operations.