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Is a Nonmember Manager Right for Your Business?

Posted by John Inhulsen | Aug 02, 2022

Limited liability companies are typically run by their member(s). In some situations, however, it is best for a limited liability company (LLC) to be managed by a nonmember manager. Under what circumstances could a nonmember manager be right for your business? 

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 can be elected by the LLC members or appointed by the LLC's operating agreement.

Once installed in office, the NMM can carries out the daily operations for the LLC, including the following:

  • Management advice
  • Financial services
  • Information technology
  • Human resources
  • Regulatory compliance
  • Administrative tasks

Should an LLC Consider a Nonmember Manager?

An NMM can be employed when a company needs their expertise to manage the business. An NMM 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 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
  • 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 a 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. 

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. 

Is a Nonmember Manager Right for Your 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.  Speak with the team at Inhulsen Law to discuss your specific situation.

About Inhulsen Law

Inhulsen Law is a Michigan law firm serving individuals, families, and businesses in the areas of business law and estate planning. To learn more call us at (616) 747-0000, visit our website.

About the Author

John Inhulsen

John Inhulsen specializes in providing strategic legal counsel on business and litigation matters, and is consistently recognized by Super Lawyers and Best Lawyers in America for his work.