Who Runs the Business in Each Structure?

Member-Managed: The Common Default Structure

In a member-managed LLC, every member generally has authority to participate in managing the business and can typically bind the LLC in ordinary business dealings, unless the operating agreement specifically limits this. This is the more common structure for smaller LLCs where the owners are also the people actively running the business day to day.

This structure tends to work well when there are relatively few members, and all of them are genuinely involved in operating the business, it becomes more complicated as the number of members grows, or when some members prefer a more passive, hands-off role.

Manager-Managed: Centralizing Authority

In a manager-managed LLC, management authority is instead delegated to one or more specifically designated managers, who may be members themselves or outside individuals brought in specifically to run the business. Non-manager members generally step back from day-to-day operational authority, retaining rights more like those of a passive investor.

This structure is common when an LLC has passive investor-members who contributed capital but do not want, or should not have, day-to-day management authority, or when the members want to bring in professional outside management.

How This Choice Is Made and Documented

Arizona LLCs are generally member-managed by default unless the operating agreement, and the corresponding filing with the Arizona Corporation Commission, specifically designates the LLC as manager-managed instead. This choice should be a deliberate decision reflected clearly in the LLC’s formation documents and operating agreement, not an afterthought.

Third parties dealing with the LLC, banks, vendors, and counterparties to a contract, often rely on this designation to determine who actually has authority to bind the business, making clarity here practically important, not just an internal governance preference.

Practical Implications for Members Who Step Back

A non-manager member in a manager-managed LLC generally retains their economic rights, a share of profits and losses, and typically retains certain protective rights like voting on major, fundamental changes to the LLC, even without day-to-day management authority. The specific rights retained depend heavily on the operating agreement’s terms.

This is a meaningfully different position than a member in a member-managed LLC, and it should be a deliberate, informed choice, not a default outcome someone discovers only after a disagreement arises about who actually has authority to make a particular decision.

Why This Choice Matters for Liability and Authority Questions

Whether a specific member or manager had actual authority to enter into a particular contract, or take a particular action, on the LLC’s behalf can become a genuinely important question in a dispute, particularly with an outside party who reasonably relied on that person’s apparent authority to act for the business.

A clearly documented management structure reduces this kind of ambiguity considerably, both for internal governance purposes and for outside parties trying to determine who they can rely on when dealing with the LLC.

Common Scenarios Favoring Each Structure

• Member-managed fits well when there are few members, all actively involved in running the business day to day.
• Manager-managed fits well when there are passive investor-members who contributed capital but not labor.
• Manager-managed also fits when the LLC wants to bring in professional outside management.
• Member-managed tends to be simpler administratively for a small, closely-involved ownership group.

Fiduciary Duties Apply Regardless of Structure

Whether an LLC is member-managed or manager-managed, those actually holding management authority, all members in a member-managed LLC, or the designated managers in a manager-managed LLC, owe duties of loyalty and care to the LLC under A.R.S. § 29-3409. This obligation does not disappear based on which structure is chosen.

This is worth keeping in mind regardless of which structure fits your business, the choice affects who has day-to-day authority, but it does not change the underlying duty that authority comes with.

Steps to Take When Choosing or Changing This Structure

1. Determine which members want an active management role versus a passive investment position.
2. Reflect the choice clearly in the operating agreement and the Arizona Corporation Commission filing.
3. Define exactly what authority managers or members have, and any limits on that authority.
4. Revisit the structure if the LLC’s membership or goals change significantly over time.