Are you looking to add a member to your existing LLC? Bringing on a new partner can provide much-needed expertise, capital, or connections to grow your business. However, it also means taking on another co-owner, so the decision requires careful thought.
This comprehensive guide will walk you through the key steps and considerations when adding a member to an LLC. Let’s dive in.
Adding a new member to your LLC can provide expertise, capital, or connections to help grow your business, but also dilutes your ownership stake. To properly add a member, follow the process outlined in your operating agreement or state law, including taking a vote, filing paperwork, and revising the operating agreement. Given the implications of sharing control, carefully weigh the pros and cons before bringing on a new co-owner.
Why Add a Member to Your LLC?
There are good reasons an LLC owner may want to add members, like gaining expertise or raising capital. However, sharing ownership also comes with downsides to consider before moving forward. This section looks at common motivations for adding members and evaluates the pros and cons of doing so.
There are several common reasons LLC owners decide to add members:
- Gain expertise the business lacks – Say you started a marketing LLC but need a technical co-founder. Adding a member with coding skills can fill that gap.
- Access more capital – Bringing in an investor member is one way to raise funds for growth or expansion.
- Motivate an employee – Giving a star employee partial ownership through an LLC membership is a powerful retention tool.
- Start a partnership – You may want to join forces with another entrepreneur or combine existing businesses into a new, jointly-owned LLC.
- Prepare for succession – Eventually you’ll exit the business, so adding a younger member now helps ensure continuity later.
Take time to think through why you want to add a member and how they’ll contribute before moving forward.
Review Your Operating Agreement
The operating agreement governs how your LLC functions and is handled day-to-day. It usually specifies the process for adding new members – like whether approval is needed from existing members.
- For single member LLCs, the operating agreement simply needs to be updated to reflect the addition of a new co-owner.
- For multi-member LLCs, the operating agreement often requires a unanimous vote from all current members to approve adding someone new.
If your operating agreement is silent on this issue, your state’s LLC laws will dictate the rules for voting on and adding members.
Before adding anyone, review your operating agreement or state laws so you follow proper protocol. Doing so helps demonstrate your LLC is run legitimately.
Decide New Member Terms
Before officially adding a new member, you need to decide key details like their ownership percentage, capital contribution, profit share, responsibilities, and decision authority. Clearly documenting these membership terms in your operating agreement is crucial to prevent issues later on. This section outlines the specifics that should be agreed upon upfront with any new members.
You’ll want to decide key details upfront before officially making someone a co-owner, such as:
- Membership interest – What ownership percentage or stake will they have?
- Capital contribution – How much will the new member invest in the business?
- Profit/loss distribution – What percent of profits and losses will they receive?
- Roles and responsibilities – Will they manage or run part of the business?
- Decision-making authority – What decisions can they make without approval?
- Buyout terms – How will their interest be valued if they exit the LLC?
Documenting these terms clearly in the operating agreement is crucial to avoiding future conflicts. Don’t make assumptions – hash out specifics before adding them.
Vote on and Approve New Member
Once you’ve decided on the terms, the next formal step is to officially approve adding the new member through a vote and amendment signing. This section walks through the voting process, including drafting an amendment, taking a vote, collecting capital, and signing the paperwork. Following proper protocol ensures a smooth member addition process.
Once terms are decided, it’s time to make it official. Here are the key steps:
- Draft an amendment to the operating agreement adding the new member’s name, ownership percentage, capital contribution, and other agreed upon details.
- Take a formal vote to approve the amendment based on the process defined in your operating agreement. Document the outcome.
- All members sign the written amendment to record the changes. This legally binds the new member to the terms.
- Collect the new member’s capital contribution after signing. They should pay for their stake upfront.
Following this process ensures proper protocols are followed in adding a new partner to the LLC.
File Updated LLC Paperwork
After a new member joins, certain paperwork needs to be submitted to state regulators and the IRS to reflect the LLC’s change in ownership. This includes filing amendments, reporting new members, obtaining EINs, and updating business licenses. Staying compliant with required filings keeps your LLC in good legal standing.
Some additional paperwork needs to be submitted after a new member joins:
- Amend your Articles of Organization – Most states require filing an amendment with the Secretary of State to reflect the LLC’s ownership change.
- Report new member to the IRS – For single member LLCs becoming multi-member, file Form 8832 to report the tax status change to the IRS.
- Get an EIN – Single member LLCs using their SSN for taxes will need to obtain an Employer ID Number (EIN) after adding a member.
- Update business licenses – Most local licenses require updating the business name or members listed when ownership changes.
Consult the compliance calendar and operate “by the book” when adding a member to maintain your LLC’s good standing.
Revise Operating Agreement
Beyond the new member amendment, the rest of the operating agreement should be updated to reflect the LLC’s new structure and ownership. Key sections to revise include:
- Members list – Update the full list of member names and membership interests
- Distributions – Adjust distribution percentages based on new proportional ownership
- Voting – Specify any changes to voting procedures or assigned votes
- Management – Designate management roles and responsibilities for new members
- Capital accounts – Add a section for the capital account of the new member
Revising the operating agreement ensures it stays current and accurately represents the reality of how your LLC now operates with the additional member(s).
Notify Banks, Vendors, Etc.
You’ll want to provide notice to outside entities that interact with your LLC once new ownership has been established:
- Banks and lenders – Send a letter informing them of new members added
- Insurers – Additional members may need to be listed on liability/E&O policies
- Vendors and creditors – They may need to update their records to reflect new decision-makers
Notifying all relevant parties helps ensure a smooth transition when members are added to or removed from an LLC over time.
Key Considerations When Adding an LLC Member
While bringing on another owner can benefit your business, there are also downsides to weigh:
- Adding members dilutes your existing ownership stake and claim to profits
- More members means more voices at the table when making decisions
- Once added, removing a member later is very difficult if the relationship goes south
Given the implications, here are some smart moves to consider:
- Think long term – Only add members who you see as a fit beyond the short term
- Start small – Give new members a smaller stake at first to test the relationship before increasing later
- Get help – Hire a lawyer to ensure your operating agreement and member terms are crystal clear and enforceable
With the right preparations and forethought, you can make adding LLC members a smooth and successful process.
Hope this guide gives you a great starting point for adding members to your LLC the right way. Just be sure to consult professionals to handle the legal and tax intricacies. With strong preparation, you can add co-owners smoothly and successfully. Best of luck growing your business!
Frequently Asked Questions (FAQs)
How much does it cost to add a member to an LLC?
The direct costs are typically minimal – just state filing fees of around $100 to amend your Articles of Organization. However, there are indirect costs like hiring an attorney to draft agreements and determine tax implications.
Do I need to notify the IRS if I add a member to my LLC?
If your LLC was originally a single member entity, you’ll need to notify the IRS of the changed tax status by filing Form 8832. Multi-member LLCs generally don’t need to notify the IRS when adding new members.
Can I add a member with 0% interest in my LLC?
Yes, you can add a member with a 0% membership interest – also called an Economic Interest Member. They have no ownership rights but still receive special tax treatment.
Do all members have to approve adding a new member?
Unless stated otherwise in your operating agreement, the default rule is that adding a new member requires unanimous approval from existing members.
Do I need to amend my LLC’s Articles of Organization to add a member?
Most states require filing an amendment with the Secretary of State in order to officially add members to your LLC. There is usually a small fee involved.
Can I add a member to my LLC if I don’t have an operating agreement?
Yes, your state’s default LLC rules will regulate the process for adding members. However, having an agreement is highly recommended to define membership terms.