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Here is my answer to a question posted on Linked-In:

QUESTION: Within a LLC, how do you clearly communicate to an investor that they only have a profit’s interest and no input on operations of the Company?

ANSWER: One of the many benefits of an LLC is the ability to separate investors from managers. This arrangement is similar to limited partnerships, where the limited partners are mere investors, and the general partner manages the partnership. With an LLC, however, the members can also be involved in managing the LLC as managers, if desired.

LLC’s Operating Agreements come in two common forms: (1) Member-Managed; and (2) Manager-Managed. Member-Managed is the simplest structure and means that every member has authority to act on behalf of the business. If all your members will have direct involvement in the management of the company, then a Member-Managed LLC usually makes the most sense.

With a Manager-Managed LLC, the members may (but need not) be managers. This form of LLC allows for a separation between ownership and management. A Manager-Managed LLC is generally used when there are “passive” members in the LLC. Passive means investors in the LLC who do not actively manage or otherwise operate the business of the Company. With a Manager-Managed LLC, the members, by virtue of being members, do not have authority to manage and operate the business of the limited liability company. Instead, the members elect “managers” and it is the managers who have this authority.

It is important in a Manager-Managed LLC that the LLC Operating Agreement have specific rules and processes for the managers to follow when managing the LLC. The LLC Operating Agreement is the governing document for the Company, the Managers, and the Members. Within the Operating Agreement is where you can clearly established the roles of the manager and the members. Here is where you can “concisely communicate to an investor [Member] that they shall only have a profit interest in the entity [Company] and not any input in the operation of the Company.” I strongly suggest you contact a competent corporate attorney. There is a lot to consider when preparing a LLC Operating Agreement and good legal counsel will go a long way to ensure proper operations of the Company and reduce conflicts among the parties involved.