How Do I Add a New Member to My LLC?

The procedure is simple as long as you understand the implications of adding an owner to your company.

It’s not difficult to add an owner to your limited liability corporation (LLC). However, you must adhere to the procedures established in your operating agreement or by state legislation.

Remember that an LLC is a separate legal entity that shields its owners from personal accountability. Following proper processes and keeping appropriate records helps in maintaining that protection and avoiding future disagreements among owners.

When adding an owner to an LLC, follow these procedures to ensure a seamless transaction.

1. Recognize the Consequences

Before adding a new LLC member, carefully evaluate both the advantages and the possible downsides. A new owner may make significant contributions to an LLC, but he or she will reduce the share of earnings that accrue to the original owners. A new owner in a member-managed LLC will also offer another voice to the decision-making process. And once someone has a stake in the company, it may be difficult to get rid of them if things don’t go as planned.

If you have a gut sense that the new owner is not someone you want as a business partner, examine if there is another method to achieve your objectives.

Adding a new owner may potentially have tax implications. If you own a single-member LLC, you will no longer be taxed as a sole owner; instead, you will be taxed as a partnership or corporation.

It’s a good idea to contact with a company attorney to be sure you understand the implications of adding a new LLC member.

2. Examine Your Operating Contract

The method for adding a new member, including how the membership must be voted on, is most likely described in your LLC’s operating agreement. It is critical to follow the method outlined in the agreement since it demonstrates that your LLC is a self-contained company with its own set of regulations.

If you don’t have an operating agreement, or if it doesn’t address adding new members, you must follow the method outlined in your state’s limited liability rules. If there is a change in ownership, several states require you to dissolve and then re-form the LLC.

If your LLC lacks an operating agreement, now is an excellent time to create one. An operating agreement is required for multi-member LLCs because it defines the owners’ rights and obligations, as well as their respective portions of the business’s earnings and losses. It is significantly simpler and less expensive to establish an operating agreement than it is to attempt to address these problems when the owners disagree.

3. Make a decision on the specifics

Once you’ve figured out how to add a new owner, you’ll need to figure out the terms of your agreement. LLCs have a fairly flexible ownership structure: for example, a person may own a specific proportion of the company yet be entitled to a different amount of the earnings.

To reach an agreement, discuss ownership percentages with the current LLC members as well as the potential new member.

4. Draft and vote on an amendment to add an owner to the LLC.

Once you’ve determined how to organise the new owner’s stake, you should draught an update to the operating agreement to include the new owner in the LLC. The new owner’s name, any financial contribution made by the new owner, the owner’s percentage stake in the firm, and the proportion of earnings and losses that may be assigned to that owner should all be included in the amendment.

The modification should next be properly voted on by the members in the manner specified in the operating agreement. Document the vote in your LLC’s minutes and/or with a resolution, and have all members of the LLC, including the new one, sign the updated operating agreement.

Keep the modified operating agreement alongside your other critical business papers at your location of business.

5. Modify the Organization’s Articles of Incorporation (if Necessary)

You filed articles of organisation with the state when you founded the LLC. To add a new member, you may be required to submit a paperwork changing the articles in certain states. In other states, there is no information about LLC members in the articles, therefore no change is required.

You may find out what your state’s requirements are by contacting the state department in charge of company filings (usually this is the Secretary of State).

6. Submit any required tax forms.

If you’ve been operating as a single-member LLC and have been using your social security number as your federal tax identification number, you’ll need to get a federal employment identification number (EIN) when you expand to a multi-member LLC. Fill out a form on the IRS website to receive an EIN for free.

If your LLC was previously treated as a sole proprietorship or partnership and you now wish to be taxed as a corporation, you must submit extra documents with the IRS to adopt corporate status. A tax accountant or a lawyer can advise you on the optimal tax status for your LLC.

Adding an LLC owner implies adding another company partner, so consider things through before you act. Once you’ve made your choice, adding a new member is as simple as following the processes outlined in your operating agreement, producing a legal record of the new ownership, and completing any appropriate paperwork with the state.