How Are Manager-Managed LLCs Taxed?

A manager-managed Limited Liability Company (LLC) establishes a formal separation between ownership and operational control. In this structure, the owners, known as members, appoint or hire managers to handle daily business operations. This setup contrasts with a member-managed LLC and is common when some members prefer to be passive investors, lack management expertise, or when the business is large and complex.

This management choice creates distinct roles between managers, who may or may not be members, and non-managing members, who hold ownership stakes but do not participate in day-to-day decisions. Managers are authorized to enter into contracts, make financial decisions, and oversee general operations on behalf of the LLC. The specific powers and duties of managers are outlined in the LLC’s operating agreement, which governs the company’s internal affairs.

Default Federal Tax Treatment

The Internal Revenue Service (IRS) does not have a specific tax classification for LLCs. Instead, it assigns a default tax status based on the number of members the LLC has. For a single-member LLC, the default classification is a “disregarded entity.” This means the IRS treats the LLC and its owner as one and the same for income tax purposes, so the business’s profits and losses are reported directly on the owner’s personal tax return. This approach is identical to how a sole proprietorship is taxed, avoiding a separate business tax return.

A multi-member LLC is treated as a partnership for federal tax purposes by default. Under this classification, the LLC itself does not pay income tax but functions as a pass-through entity. Profits, losses, deductions, and credits are passed through to the individual members, who then report them on their personal tax returns.

Self-Employment Tax Implications for Managers and Members

A tax consideration in a manager-managed LLC is the application of self-employment taxes, which cover Social Security and Medicare contributions. The tax treatment of a member’s income hinges on whether they are an active participant or a passive investor. A member’s share of the LLC’s income is subject to self-employment tax if they are actively involved in the company’s operations.

The determination of active participation is based on a member’s actual role and responsibilities, not just their formal title. A member whose involvement is purely that of a passive investor may not owe self-employment tax on their share of the profits. The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security on earnings up to an annual limit ($176,100 for 2025) and 2.9% for Medicare on all earnings.

In some cases, managers receive “guaranteed payments” for their services. These are payments made to a member for services rendered to the LLC, regardless of the company’s profitability. Guaranteed payments are treated as ordinary income to the receiving member, are subject to self-employment taxes, and are a deductible business expense for the LLC.

Elective Tax Classifications

Beyond the default tax treatment, a manager-managed LLC can elect a different tax classification as either an S Corporation or a C Corporation. An LLC can elect to be taxed as an S Corporation, which can provide self-employment tax savings for manager-members. Under an S Corp election, manager-members who provide services to the company must be paid a “reasonable salary,” which is subject to payroll taxes. Any remaining profits can be distributed as dividends, which are not subject to self-employment tax.

Alternatively, an LLC can elect to be taxed as a C Corporation. When taxed as a C Corporation, the LLC’s profits are taxed at the corporate level, separate from the owners’ personal income taxes. This structure can lead to “double taxation” if profits are distributed as dividends, as they are taxed once at the corporate level and again at the individual level. This election may be advantageous for businesses that plan to reinvest a significant portion of their profits back into the company.

Required Tax Filings and Forms

The specific tax forms an LLC must file depend on its tax classification.

• A single-member LLC classified as a disregarded entity reports its income and expenses on Schedule C, which is filed with the owner’s personal Form 1040. No separate business tax return is required for the LLC itself.
• An LLC taxed as a partnership must file Form 1065, U.S. Return of Partnership Income. This is an informational return, and the LLC provides each member with a Schedule K-1 detailing their share of income and deductions.
• If an LLC elects to be taxed as an S Corporation by filing Form 2553, it must then file Form 1120-S annually. Similar to a partnership, the S Corp provides each member with a Schedule K-1.
• For an LLC electing to be taxed as a C Corporation via Form 8832, the required annual filing is Form 1120, U.S. Corporation Income Tax Return. The C Corporation pays taxes directly on its profits.