If you are considering adding a new member to your LLC, congratulations! Adding new members is a big step in growing your business, and there are some important aspects to consider when you are bringing on a new business partner.
Forming a limited liability company (commonly called an LLC) requires filing the appropriate documents with the appropriate state agencies. The state agency (in many states, this is the secretary of state’s office) will then issue a certificate authorizing the company to operate in the state as an LLC.
Sometimes, after the LLC is created, there are changes in business. Members may want to leave the company, or new members may want to join in. Any time you are adding a new member to the LLC, you will want to be very careful in order to protect the limited liability status of the company and avoid additional tax risks.
- What Steps Should I Take in Adding New Members to My LLC?
- What If the Operating Agreement Does Not Have A Section Regarding New Members?
- Before Adding a New Member: Call a Meeting of the LLC Members
- Before Adding a New Member: Amend the Operating Agreement
- If I Add a New Member, Will I Need To Amend The Articles Of Organization?
- How are Taxes Affected From Adding a New LLC Member?
- Do I Need a Lawyer If I Want to Add a New LLC Member?
If you are planning on adding a new member to the LLC, there are a few things that you will need to consider as you prepare the appropriate paperwork. First of all, you may need to get the approval of the rest of the members of the LLC (if you currently have a single-member LLC, this can be pretty easy!).
You will also need to review the LLC’s operating agreement. The operating agreement is a contract that outlines how the LLC is structured, and now the company operates. If the operating agreement includes sections on how to add new members, you will need to follow the rules in those sections. This will help avoid upsetting other current owners.
However, if the operating agreement does not include sections regarding new members, you don’t have a standard set of rules specific to the company. You will need to turn to your state’s laws regarding limited liability companies in order to figure out your course of action.
In some states, you may be able to add a new member simply by drafting a new document outlining the members’ intent to add a new member by a certain date. However, in other states, the laws may require that you dissolve and then re-form the LLC if there is a change in ownership. You may want to consult a business lawyer to determine the best course of action.
If your LLC does not have an operating agreement, you may want to have one drafted now! An operating agreement is especially important for multi-member LLCs because it sets out all the owners’ rights, responsibilities, and their shares of the profits and losses of the business. Having an operating agreement put together first is easier and cheaper than trying to resolve disputes that arise later.
If your LLC has more than one member, you may want to set up a meeting of the members to discuss the new member before voting. Some things to consider at the meeting might be the financial resources, qualifications, and business experience of the potential new partner, and what the new partner can bring to benefit the organization. Other LLC members may want talk with the potential new member, as well, since they will be owning a business together (a big decision).
If the LLC has an operating agreement, you may need to amend several provisions when bringing on a new member. The percentage of shares of each of the company’s members will change, as well as the distribution and division of profits and losses, the members’ capital contributions and voting capacities. Because a new member will also receive a stake in the company, the shares of the current members’ distributions, losses, and profits will have to change accordingly.
Yes, you will need to amend the Articles of Organization. Many state agencies have standard forms that you can use to amend the articles. Generally, the form requires you to provide important information regarding the LLC, including:
- Membership changes;
- Membership interests (percentages of ownership); and/or
- Registered agent for service.
The amendment will have to be filed with your secretary of state’s office (or whatever agency is responsible for business filings in your state).
Operating agreements generally do not have to be filed with the state, so you can amend the operating agreement without any extra filing (although some states give you the option to do so).
If you have a single-member LLC, you are allowed to use your social security number for your federal tax identification number. However, once you add another member to the company and create a multi-member LLC, you will be required to get a federal Employer Identification Number (EIN). You can do this by filling out a free online form at the IRS website. The EIN will be your LLC’s tax number for both state and federal filing.
Generally if the structure of the company changes (for example, from single-member to multi-member LLC), you may need to get a new EIN. If, however, the LLC is already a multi-member LLC and adding a new member, you likely will not need to change the existing EIN.
You may need to file additional forms with the IRS to elect corporate status if the LLC was previously taxed as a partnership or sole proprietorship. Of course, a tax accountant or a business or tax lawyer can help advise you on the best way to approach taxes for the LLC.
If you are considering taking on a business partner and adding a new member to your LLC, it is in your best interests to talk to an experienced business lawyer. Adding a new member and growing the business is exciting, but there are several moving parts that you need to consider, from the operating agreement to taxation.
A lawyer can give you advice on the best way to proceed without compromising the structure of the LLC, prepare and file the appropriate documents with the appropriate agencies, and help preserve the limited liability status of the company.