A limited liability company, or LLC, is a specific type of business. There are many different types of business entities which exist in the United States, such as partnerships and corporations. According to business law, if someone files a lawsuit against a corporation and that suit is successful, the corporation is to pay money out of the corporation’s assets. What this means is that the owners of the corporation are not personally liable for the corporation’s debts, nor are they held personally liable for damages awarded against the corporation in a lawsuit.
Corporations must adhere to what is known as double taxation. This means that corporate profits are first taxed to the corporation, as they are earned. These profits are then taxed to shareholders, as capital gains income, wherein the shareholders receive their dividends.
How this applies to an LLC is that a limited liability company has many of the advantages of a corporation in that the owners’ individual assets are shielded from creditors. These assets are also shielded from legal claims made against the LLC.
LLCs are not taxed at the entity level. Meaning, unlike corporations, they do not pay taxes as an LLC; the only taxes paid are paid by those individual members who have earned a profit. To put it another way, the income essentially passes through the LLC and is only taxed at the individual member level. Partnerships, sole proprietorships, and limited partnerships share a similar tax structure.
Another way in which limited liability companies differ from corporations is in terms of ownership structure. LLCs are owned by individuals, whereas corporations are owned by shareholders. Generally speaking, LLC owners are not personally liable for liabilities or debts incurred by the LLC. This is what allows LLC owners to manage the business without worrying about losing their own assets should any issues arise.
What Is the Process for Forming a Limited Liability Company? Is It Difficult to Add a New LLC Member?
As adding new members to an LLC is a big step, there are some important aspects to consider when bringing on a new business partner. First, it is important to understand the general process for forming a limited liability company.
In order to form an LLC, business owners are required to follow a series of steps. These steps generally include:
- Determining who will be members of the LLC;
- Creating and registering a unique business name;
- Filing the articles of organization, which are documents usually filed with your state’s Secretary of State; and
- Filing an operating agreement, if required by state law.
Many states also require that a document, known as an initial information statement, be filed in addition to the aforementioned paperwork. This statement must be filed within a short period of time, commonly up to ninety days, of the filing of the articles of organization. This statement must provide the names and addresses of LLC members, as well as managers. Additionally, the LLC must pay a fee to the Secretary of State.
From there, an additional statement of information must be filed periodically. This is generally every one or two years. If any information contained within the initial statement has changed, the new information should be included in subsequent filings.
Some states will require LLCs to pay franchise taxes. Franchise tax returns are filed with the state’s Franchise Tax Board (“FTB”). If an LLC has any employees, they must also pay state and federal employment taxes. And, LLCs must also pay unemployment insurance taxes, as well as collect and pay sales taxes.
After the LLC is created, there may be some significant business changes. Members may want to leave the company, or new members may want to join in. If you are adding a new member to the LLC, you should do so carefully in order to protect the limited liability status of the company, as well as avoid additional tax risks. Because of this, it can be difficult to add a new LLC member.
What Steps Should I Take When Adding New Members to My LLC?
If you would like to add a new member to the LLC, there are some important things that you will need to be mindful of as you prepare the required paperwork. The first step would be that you need to get the approval of the rest of the members of the LLC, if there are any besides yourself.
Additionally, you will need to review the LLC’s operating agreement. This is a contract which outlines how the LLC is structured, as well as how the company operates. If the operating agreement includes information regarding how to add new members, you must follow the rules contained within the contract. Doing so can reduce the risk of issues arising with the other LLC owners.
However, if the operating agreement does not include any instructions regarding new members, you do not have a standard set of rules specific to the company which you must abide by. You will need to base your actions on your state’s laws regarding limited liability companies.
Some states allow new members to be added simply by drafting a new document. This document outlines the members’ intent to add a new member by a certain date. However, other state laws may require you to dissolve and then re-form the LLC if there is a change in ownership.
As you can see, an operating agreement is especially important for multi-member LLCs. This is because it sets out all the owners’ rights and responsibilities, as well as their shares of the profits and losses of the business. If your LLC does not have one, you should consider making this your first step before any other part of the partner addition process.
What Else Should I Do Before Adding a New Member?
If your LLC consists of more than one member, you should arrange a meeting of the members in order to discuss the new member before voting. Some examples of what should be discussed might include:
- The financial resources that the potential new partner can offer;
- Their qualifications;
- Any business experience of the potential new partner; and
- What the new partner can bring to benefit the organization.
For LLCs utilizing an operating agreement, the agreement may need to be amended. This could include several provisions when bringing on a new member. Amendment may be necessary due to the fact that the percentage of shares of each of the company’s members will change, as will the distribution and division of profits and losses.
The members’ capital contributions and voting capacities will also change with the addition of a new LLC member. A new member will also receive a stake in the company; meaning, the shares of the current members’ distributions, losses, and profits must reflect those changes.
Many state agencies provide standard forms that you can utilize to amend the articles. Generally speaking, the form requires you to provide important information regarding the LLC such as:
- Membership changes;
- Addresses for everyone involved in the LLC; and
- Membership interests, or, percentages of ownership.
Any amendments must be filed with your secretary of state’s office, or whatever agency is responsible for business filings in your state. Operating agreements do not usually need to be filed with the state; meaning, you can amend the operating agreement without any extra filing, although some states provide the option to do so.
Do I Need a Lawyer If I Want to Add a New LLC Member?
If you are involved in an LLC and are considering adding a new member, you should consult with a local corporate lawyer. An experienced and local business attorney will best understand your state’s specific laws regarding the matter, and how those laws will affect your legal options moving forward.
An attorney can also give you advice regarding the best way to proceed, without compromising the structure of the LLC. Additionally, an attorney can also prepare and file the appropriate documents with the appropriate agencies, and can represent you in court as needed.