When you’re in the early stages of growing your business, technicalities like job titles are the last thing on your mind. In fact, there’s a good chance you’re the CEO, sales manager, and IT support all rolled into one.
As your business grows, it makes sense to start formalizing your business’s legal, ownership, and management structures. If you choose to become a partnership or a limited liability company (LLC), then you’ll need to understand the role of a managing partner.
What is a managing partner in an LLC?
An LLC is a business structure that is legally distinct from the owner or owners of the business. In other words, if an LLC is being sued or goes bankrupt, the owners’ personal assets are not at risk.
This makes it different from other structures like a sole proprietorship — a business structure with one owner who is not legally distinct from his or her business (most freelancers fall into this category). It’s also different from a corporation (e.g., Microsoft, Dominos), which has a different management structure and taxation scheme.
The owners of an LLC are called members, and they can be individuals or businesses. A member-managed LLC is run by one or more of its members. Alternatively a nonmember manager can be hired to oversee the business. This arrangement is called a manager-managed LLC.
The members of an LLC are sometimes referred to as partners. The managing partner is someone who is a member and a manager of the business. They are responsible for day-to-day operations and implementing long-term strategies.
Mark Donnolo is the managing partner of business consultancy SalesGlobe. The company is an LLC with a handful of partners who are all involved in the business, but Donnolo takes the lead. “I think of a managing partner as a first among equals,” he says. “It’s the person that’s leading the charge strategically.”
Sometimes a business will have more than one managing partner. Beth Hellowell and Nathan Palmer are the co-founders of Signify Digital, a digital marketing firm. The agency is a limited company, a business structure in the UK that is similar to an LLC in the US. Hellowell and Palmer are both managing partners, and they share decision-making and management responsibilities equally between them.
Managing partners in partnerships
A partnership — like an LLC — is a kind of business structure. There are several types of partnerships, each with different legal implications, but in all of them, it’s common for one of the partners to be selected as a managing partner and become responsible for the daily operations of the business.
Other partners may be actively involved but take less of a strategic leadership role than the managing partner, or they may not be involved in the running of the business and simply provide capital.
Managing partner vs. CEO
A managing partner and a chief executive officer (CEO) are both senior executives who play a leadership role. Usually they are the highest-ranking person in the business. But there are some differences between the two.
- Business structure: The managing partner role only exists in a partnership or LLC. A corporation is required by law to have a CEO, but companies with other structures could also choose to appoint one.
- Ownership: A managing partner is always an owner in the business, but a CEO may or may not own a part of the business.
- Dismissal: A CEO can be fired, but if a managing partner exits the partnership, that process will be determined by the partnership agreement and will lead to a change in ownership.
- Reporting: Typically, a CEO reports to a board of directors (if there is one) and the owners, who could be members, partners, or shareholders, depending on the business structure. A managing partner, meanwhile, reports to the other partners or an executive committee made up of some of the partners.
- Compensation: A CEO will typically receive a salary and a performance incentive, while a managing partner will typically earn income through profit share.
Some people view “managing partner” as a legal designation, something to be filled in on a government form, rather than a job role that comes with daily responsibilities. In that case, a person can be both a managing partner, for legal purposes, and a CEO, which is the role that appears on their business card. Others see “managing partner” as a job title in and of itself.
Managing partner vs. owner
As mentioned above, a managing partner is an owner of the business, but they are also involved in running the business and play an executive leadership role. Not all owners are managing partners.
Some owners are not involved in management and will simply provide capital. Some owners play an executive role but are less senior than another owner who has the title of “managing partner.”
Managing partner vs. limited partner
A limited partnership is a type of partnership where at least one person is actively involved in the business (known as a general partner), and at least one person who just provides money but is not otherwise involved (known as a limited or silent partner).
A limited partner shares in the profits of the business but is not responsible for its debts and liabilities. In a limited partnership, a general partner may take on the role of managing partner.
Managing partner role and responsibilities
The responsibilities of a managing partner typically include:
- Strategic planning
- Addressing core business challenges
- Financial management
- Employee management
- Internal and external communication
They may delegate some aspects of these responsibilities, or take on additional roles. For instance, Donnolo is very involved with business development, intellectual property development, and content creation because these functions match his strengths and past experience, but managing partners with different backgrounds may have other focuses.
At Signify Digital, Hellowell deals predominantly with client management and business development, while Palmer covers work delivery and campaign strategy.
“Having two partners suits our business well,” says Hellowell. “While we have the same passion and vision, we each bring a different skill set to the company.”
Managing partner agreement
A partnership agreement is a written agreement between business partners or LLC members. It lays out important information about the company such as:
- Capital contributions — how much capital each partner has contributed
- Equity agreement — how much of the company each partner owns
- Operating details — the responsibilities of each partner
- Compensation agreement — how will each partner be paid
- Disputes — how will they be resolved
- New partners — if, when, and how someone can become an owner
- Exit agreement — what happens when a partner leaves the partnership
- Decision rights — whether decisions require consensus or a majority, for example
Sometimes you need to draw up this agreement early on, if there are seed investors who want to contribute capital and need to know their rights and ownership share.
At other times, if you are starting a new venture, you may not know who will be involved and whether you will raise investment. In that case, you might want to let the idea shape out a little before you formalize things.
That being said, it’s very important to get things on paper.
“Teaming up with people always seems fun and rosy and optimistic in the beginning,” says Donnelo, “but when things really get tough, that’s when personalities and differences start to show. Operate on the assumption that we need to make sure everybody’s gonna be protected, just in case.”
Donnello recommends speaking to an attorney and, if you can afford it, an executive compensation consultant when you write up your agreement. However, there are some simple templates you can start with if that’s out of your budget. The agreement should be reviewed and tweaked as your company grows and evolves.
Managing partner compensation
Compensation structures for managing partners can be complicated, as they can take different forms and will vary from one business to the next.
Distributive share
Partnerships (as well as some LLCs) are flow-through tax entities, which means the company’s income (both profits and losses) pass directly on to the owners. This is called a distributive share.
Most of the time, partners receive a distributive share that is proportional to their ownership percentage. For example, if one partner owns 80% of the business and the other owns 20%, they will split any profit 80-20.
Partners can also choose to divide their income however they like by outlining the arrangement in their partnership agreement. This can be done for tax purposes or for any other reason, such as if one partner is taking more of a reputational risk.
Guaranteed payment
According to IRS rules, a partner cannot be considered an employee or be put on the payroll. However, if a partner contributes services or capital to the business, they may receive a guaranteed payment in lieu of a salary.
This is a fixed payment that ensures the partner has predictable income even if the company doesn’t make a profit. Guaranteed payments differ from a salary in that they are not subject to payroll tax. Instead, they will be taxed as ordinary income as part of the partner’s individual tax return.
Managing partners and any other active partners may also receive an additional payment in lieu of a performance incentive or bonus, but again this payment is not taxed via payroll and is not technically classified as a paycheck.
In Hellowell and Palmer’s case, they split everything 50-50. They take a fixed amount from the business each month and review that figure every six months. Any excess profit is reinvested in the business or kept in a fund for future use.
“We have found that an equal share of decisions, challenges, and rewards keeps us both motivated and on our toes at the same time,” says Hellowell.
Equity
Of course the biggest advantage for owners is that they own a portion of the business. If the business grows and is successful, their portion of the equity will become an increasingly valuable asset.
Compensation in an LLC
By default, an LLC with multiple members is treated by the IRS as a partnership. This means the managing partner’s compensation will be paid (and taxed) in the same way as if the business was a partnership.
However, an LLC can also choose to be treated as a corporation, which is sometimes done for tax purposes. In that case, members must be hired as employees and paid a salary to earn an income. They can also earn a share of the profits in the form of dividends.
If your business is an LLC, it’s a good idea to consult an accountant to work out salary and dividend amounts, as there are regulations and tax implications.
What did you think of this article?
