When two sponsors form a GP entity at the start of a real estate venture, they often share an implicit understanding: both of us will be involved in everything. That is a reasonable starting point for a small, active founding team. The problem is that the operating agreement they sign — or fail to carefully negotiate — may reflect something different from that understanding, or may reflect it too literally in a way that creates problems the moment the team grows, roles diverge, or one partner becomes more operational than the other.
The choice between a member-managed and a manager-managed LLC structure for a GP entity is not a minor drafting preference. It determines who controls the vehicle, who can legally bind it, what decisions require broader consent, where fiduciary duties sit, who bears exposure when something goes wrong, and whether the governance structure will hold together as the platform scales. Done carelessly, it creates legal ambiguity at precisely the moment it is least welcome: when a co-sponsor dispute surfaces, when an investor asks who approved a decision, or when a lender needs to know who can sign the loan modification.
Delaware, which governs most private real estate GP entities, gives members extraordinary freedom to design governance through the operating agreement. That flexibility is one of Delaware’s most important features for real estate sponsors. It is also the reason that the default rules — the fallback framework that applies when the agreement is silent or thin — need to be understood clearly, because an ambiguous operating agreement often produces exactly the governance the principals did not intend.
The Fundamental Distinction: Where Control Actually Lives
The difference between member-managed and manager-managed is not a question of ownership. In both structures, members hold economic interests in the LLC. The question is who exercises management authority over the entity — and the answer carries direct legal consequences.
Member-Managed: Ownership and Control in the Same Group
In a member-managed LLC, management authority is vested in the members themselves. Under Delaware’s LLC Act — specifically Section 18-402 — management is vested in the members in proportion to their then-current percentage or other interest in the profits, with decisions of members owning more than 50% of that interest controlling, unless the LLC agreement provides otherwise. If the operating agreement says nothing different, whoever holds the majority of the economic interest also controls governance decisions.
Member management works naturally when the people who own the entity are the same people who run it — when two or three active principals jointly source deals, negotiate financing, manage assets, handle investor communications, and make decisions together as equal partners. The ownership table and the management table are the same table.
The structure also carries a binding authority implication that matters practically. In a member-managed LLC, each member is generally an agent of the company for the purpose of carrying on its business. That means a member’s act in the apparent scope of the LLC’s ordinary business can bind the entity even without formal authorization from the other members. Unless the operating agreement restricts this default, any member may be able to create obligations for the LLC by acting unilaterally in a context that looks like ordinary business.
Manager-Managed: Ownership and Control Deliberately Separated
In a manager-managed LLC, the operating agreement vests management authority in one or more designated managers rather than in the members generally. Those managers may be members, or they may not be — Delaware’s LLC Act permits managers who hold no economic interest, and real estate sponsor structures frequently use this flexibility when a management company or a specific principal serves as manager while other principals hold economic interests without active governance roles.
The critical difference for members who are not managers is this: they are generally not agents of the company solely by reason of being members. Signing authority, negotiating authority, and the ability to commit the entity to contracts, modifications, and decisions flows through the designated manager or managers — not through every owner. The separation removes the ambiguity that member management creates when participants have different levels of involvement.
That separation is what makes manager-managed the right design for most GP entities once the sponsor platform has grown beyond a small group of equally active co-founders. When some participants are passive investors in the GP economics, when roles have differentiated between operational and strategic, or when lenders and counterparties need clarity about who can actually commit the entity, the manager-managed structure answers those questions before they become disputes.
| 📌 The Practical Difference: Who Can Sign the Loan Modification? Consider a GP entity with three members: two active managing principals and one capital partner who contributed to the GP economics but plays no role in day-to-day operations. The fund’s construction lender is requesting a loan modification and needs a signature from the GP. If the GP is member-managed, all three members are potentially agents of the company in the ordinary course. The capital partner could arguably sign the loan modification, or at least create a dispute about whether a signature binds the entity. That ambiguity forces the lender to investigate, triggers questions about authorization, and may require a consent resolution to ratify something that should have been a routine execution. If the GP is manager-managed, and the operating agreement designates the two active principals as managers, the answer is immediate: the managers sign, the capital partner does not, and no one spends time resolving an authority question that document design should have answered at formation. |
Delaware’s Framework: Default Rules and What the Operating Agreement Actually Does
Delaware is the preferred jurisdiction for real estate GP entities because its LLC Act gives sponsors extraordinary flexibility to design governance through contract. Section 18-1101 of the Delaware LLC Act expresses the statute’s governing principle directly: to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. Delaware courts enforce the operating agreement first and apply statutory or equitable principles only where the agreement is silent.
That policy creates both an opportunity and a responsibility. The opportunity is that Delaware does not impose a rigid governance framework. The responsibility is that a thin, template, or silent operating agreement will produce the defaults — and the defaults, while functional for the simplest structures, rarely reflect what sponsors actually intend once the platform has any complexity at all.
The Default Rules
Section 18-402 of the Delaware LLC Act provides the baseline for member-managed entities: management is vested in the members in proportion to their profits interest, decisions are made by members owning more than 50% of the profits interest, and each member has general agency authority to bind the entity in ordinary business. Section 18-402 also provides that if the LLC agreement provides for management by a manager, management is vested in the manager to the extent provided, with the manager chosen in the manner specified in the agreement.
The defaults work adequately for a two-person founding team where both principals are equally active and aligned. They become inadequate when the team grows, roles diverge, or economic interests are distributed among people with meaningfully different levels of involvement. A capital partner who owns 20% of the GP economics but plays no operational role should not, in most structures, carry the same default agency authority to bind the entity as the managing principal who runs the platform. In a member-managed LLC with a thin operating agreement, that is exactly what the default produces unless the agreement addresses it specifically.
Fiduciary Duties Under Delaware’s Framework
The fiduciary duty analysis is closely tied to the management structure. By default, Delaware courts have held that managers and managing members of a Delaware LLC owe fiduciary duties — specifically the duty of loyalty and the duty of care — to the LLC and its members, drawing on corporate law precedent where the LLC agreement is silent. Section 18-1104 of the Delaware LLC Act provides that in cases not addressed by the LLC Act, the rules of law and equity, including fiduciary duties, shall govern.
In a member-managed LLC, those default fiduciary duties attach to every member exercising management authority. In a manager-managed LLC, they attach primarily to the designated managers. Members who are not managers generally do not owe fiduciary duties to the LLC or other members solely by reason of holding an economic interest.
Delaware’s most important structural feature enters here. Section 18-1101(c) permits the LLC agreement to expand, restrict, or eliminate fiduciary duties — including the duties of loyalty and care — subject to one non-waivable limit: the implied contractual covenant of good faith and fair dealing cannot be eliminated. Section 18-1101(e) permits the agreement to limit or eliminate liability for breach of fiduciary duty, again with the same floor. And Section 18-1101(d) protects members and managers who rely in good faith on the provisions of the LLC agreement from breach of fiduciary duty claims for that reliance.
For real estate sponsors, this means the management label chosen at formation does not permanently fix the fiduciary obligation landscape. But it does establish the default that governs when the operating agreement is silent. And where the agreement modifies those defaults — eliminating or restricting duties, clarifying the standard of care, defining what constitutes a conflict — the provisions must be drafted with enough specificity to be enforced. Delaware courts will enforce clear contractual modifications; they will not create protections the agreement does not provide.
Decision-Making, Voting Thresholds, and the Allocation of Authority
Choosing the management structure is the first governance decision. Deciding which decisions fall within that structure — and which ones require broader consent — is the second, and often more consequential, one. A GP operating agreement that selects manager-management but then leaves the authority allocation undefined has answered only part of the governance question.
Allocating Decisions Across Three Tiers
The most functional GP operating agreements divide decision authority into three tiers, calibrated to the speed and consequence of each type of decision.
Ordinary operational decisions are those that must be made routinely and quickly: executing vendor contracts within approved parameters, managing lender relationships, supervising property-level personnel, producing investor reporting, handling routine entity administration. These should rest with the manager or a majority of managers without requiring broader consent. A governance structure that forces routine operational decisions through a member vote is not a check on managerial authority — it is a delay mechanism that slows the platform down without producing better outcomes.
Major strategic decisions are those that materially change the direction, risk profile, or economics of the platform: acquiring or disposing of assets above defined thresholds, admitting new principals, amending the operating agreement, approving affiliate transactions above stated limits, entering material financing arrangements, or changing the investment mandate. These warrant supermajority or unanimous member approval because their consequences are significant enough that the people with economic exposure have a legitimate interest in the outcome.
Reserved protective matters are a narrow list of decisions that give minority principals a meaningful check on actions that would directly affect their position: dilutive issuances, fundamental changes to promote or waterfall economics, and actions that would materially alter a member’s rights. The reserved-matter list should be exactly that — narrow and specific — rather than a general veto on everything the manager proposes.
Without that three-tier allocation, governance friction tends to appear at the wrong moments. When every decision feels either too small for a vote or too consequential for one person to make alone, the operating agreement is not doing its job. Good governance design answers the question before the first disagreement makes it urgent.
The Implied Covenant as the Floor
Even in a GP agreement that extensively modifies or eliminates default fiduciary duties, the implied contractual covenant of good faith and fair dealing remains in place and cannot be contracted away. Delaware courts have interpreted this covenant to prohibit conduct that would frustrate the other party’s reasonable expectations under the agreement, even if the specific conduct is not expressly prohibited. For sponsor groups that use Delaware’s flexibility to eliminate or substantially restrict fiduciary duties in the operating agreement, the implied covenant serves as the practical floor below which conduct cannot fall without creating legal exposure.
The practical application: a manager who uses the operating agreement’s flexibility to act in ways that are technically permitted but that frustrate the reasonable expectations of non-managing members — selectively withholding information, structuring transactions to capture economics that the members reasonably expected to share, or acting in ways that undermine the bargain the parties made when they formed the entity — may face implied covenant claims even when fiduciary duty claims are foreclosed by the agreement. Understanding where the floor is matters as much as understanding how high the ceiling can be raised.
Investor Dynamics, Team Composition, and Which Structure Fits
When Manager-Managed Is the Right Answer
Manager-managed structures are the better choice in most of the situations where real estate GP entities operate in practice. The structure fits whenever some of the economic participants are intended to be passive: capital partners who contributed to the GP economics without taking an operational role, junior principals who have a promoted interest in future deals but are not yet exercising discretionary authority, or strategic participants who should receive reporting and have limited protective approval rights without functioning as decision-makers.
Manager-managed also fits whenever clarity of signing authority matters to counterparties. Lenders, joint venture partners, title companies, and sophisticated investors all benefit from a clear answer to the question of who can commit the entity. A manager-managed structure with a well-drafted operating agreement provides that answer without requiring the other party to investigate the internal dynamics of the sponsor group every time an execution is needed.
Finally, manager-managed structures age better as platforms grow. Once the GP is running multiple concurrent deals, has affiliate arrangements with the management company, is managing promote splits across different principal groups, or is considering institutional capital at the platform level, centralized management authority with a clear chain of command produces governance that can survive complexity. A member-managed structure that was collaborative and functional for three co-equal founding partners often becomes cumbersome when the team has eight people with differentiated roles and varying levels of operational involvement.
When Member-Managed Makes Sense
Member-managed structures genuinely make sense in a specific and relatively narrow set of circumstances: a small, highly active founding team where every person with an economic interest is also a daily operator, where roles have not yet differentiated, and where the principals want governance to reflect the reality that they are making decisions together rather than delegating to a designated authority.
For that kind of collaborative founding structure, the member-managed default can be appropriate precisely because the ownership table and the management table are the same table. Creating a manager layer above a small, fully active team adds ceremony without adding clarity. The caution is that member-managed should be chosen because the team is genuinely operating that way — not because nobody thought carefully about structure, and not as a permanent arrangement for a platform that will inevitably grow into roles the original documents did not anticipate.
The Hybrid Answer: Manager-Managed With Carefully Drafted Member Rights
The choice between member-managed and manager-managed is not binary in practice. The most common and most functional approach for a developing real estate GP platform is a manager-managed structure with carefully drafted member rights: centralized operational authority in the manager, a specific list of reserved matters that require member approval, defined information rights for all members regardless of management role, and indemnification provisions that protect the people actually making decisions.
Delaware’s freedom-of-contract principle specifically enables this kind of hybrid design. The agreement can restrict or expand duties, define the standard of care that applies to managers, specify what constitutes a conflict and how it is handled, and give non-managing members whatever visibility and approval rights the principals negotiated. The result is a structure that is neither rigidly centralized nor loosely collective, but calibrated to how the specific platform actually operates.
Liability, Risk Allocation, and Indemnification
Neither management structure eliminates the LLC’s liability shield at the entity level. Under Delaware’s LLC Act, the debts and liabilities of the LLC are the company’s debts and liabilities, and no member or manager is personally liable for those debts solely because of membership or managerial status. That baseline protection exists in both member-managed and manager-managed structures. What the management structure does change is where the practical risk of specific decisions sits.
Decision-Makers Bear Decision Risk
The person in the management seat is the one making operational calls, approving distributions, handling conflict situations, and signing documents. When something goes wrong — a wrongful distribution, an unauthorized transaction, a conflict that was not properly managed — the governance structure determines whose decision that was. In a member-managed LLC, that question may be answered by evidence of which member actually made the call. In a manager-managed LLC, the answer is typically cleaner: the manager made the decision, and the standard of care and duty analysis flows from that designation.
Delaware specifically provides that a member or manager who relies in good faith on the provisions of the LLC agreement is not liable for breach of fiduciary duty for that reliance. That protection is available to anyone — manager or member — who follows what the operating agreement says. It is not available to someone who acts outside the agreement’s boundaries, even if they held the relevant authority at some point. This is why a well-drafted operating agreement is not only a governance document. It is also the first layer of protection for the people who exercise authority under it.
Indemnification: Match Protection to Decision Authority
Indemnification provisions should track the governance structure. In a manager-managed LLC, the managers are the ones making decisions on behalf of the entity, facing the exposure that comes with those decisions, and entitled to the protection that comes with acting in good faith within their authorized scope. Delaware’s LLC Act permits the LLC to indemnify and hold harmless any member, manager, or other person, subject to standards and restrictions in the LLC agreement. In a member-managed LLC, indemnification should cover the members who exercise management authority. In a manager-managed LLC, it should cover the designated managers.
The practical design issues that sponsors most commonly underaddress in indemnification provisions are three: coverage of advancement of expenses — meaning whether the entity will pay legal costs as they are incurred rather than only after a successful outcome — the carve-outs for conduct that falls outside the indemnification — typically bad faith, willful misconduct, or breach of the implied covenant — and coordination with any directors and officers or errors and omissions coverage the platform may carry. A generous indemnification provision in the operating agreement that is not backed by accessible entity assets or insurance provides less practical protection than it appears.
When the Structure Needs to Evolve
One of the most common GP entity problems is not a bad choice at formation but a failure to revisit the structure as the platform changes. A member-managed GP with two founding partners that made sense at the start of the platform can become a serious governance problem when the team has grown, roles have differentiated, outside capital has entered the GP economics, or the partners’ levels of engagement have diverged over time.
The indicators that a revisit is warranted include: a capital partner or promote participant has entered the GP without any adjustment to the management structure; one principal has become the operational driver while others have become more passive or strategic; the signing authority question has come up in a lender or counterparty context and produced delay or confusion; or the entity is about to launch a fund structure that requires governance mechanics more sophisticated than those designed for a single syndication.
Converting a member-managed LLC to a manager-managed structure requires an operating agreement amendment, which in turn requires the consent thresholds specified in the existing agreement. If the existing agreement requires unanimous member consent for amendments, that consent must be obtained. If the existing agreement is silent on the amendment threshold, Delaware’s default — majority of profits interest — applies. The right time to address this question is before a specific governance situation makes it contentious.
The Operating Agreement Does the Real Work
The choice between member-managed and manager-managed is a starting point, not a complete answer. Both structures can work well when paired with an operating agreement that accurately reflects how the sponsor platform will actually operate: who makes decisions, what decisions require broader approval, what information flows to non-managing members, what duties apply and which ones have been modified, and who is protected when decisions produce adverse outcomes.
What does not work is the combination of a structural label and a thin operating agreement. A manager-managed LLC whose operating agreement says little about the scope of manager authority, the reserved-matter list, indemnification, or information rights is not a well-governed entity. It is an entity with a label that raises expectations the documents cannot satisfy.
Delaware gives sponsors the tools to build a GP entity that is precisely suited to how the platform operates, how the principal group is composed, and how authority and accountability should be allocated. Using those tools requires deliberate drafting calibrated to the actual structure of the business — not a template selected from the first search result, and not an agreement that was never revisited after it was signed for the first deal.
The GP entity that is designed correctly from the start — with a management structure matched to the composition and operating model of the sponsor group, authority allocated across tiers that reflect decision speed and consequence, and protections written for the people who will actually exercise authority — is one that holds together when the platform grows and when conditions produce the governance situations that less careful documents cannot handle.