Are you thinking of adding a new member to your LLC? There are many reasons why you may want to add an additional person in the entity. Perhaps you want to expand your services and need someone with a specialized expertise. Or maybe you are needing more funding and the additional owner sees your company as an investment.
No matter the reason, there are procedures that you will have to follow to legally add an individual to your LLC. As a business owner, it’s important to not only understand the steps but also the ramifications of bringing someone new onboard. Below you will find some important considerations that you should take to heart as you add a new LLC owner:
1. Review the LLC Operating Agreement
An LLC operating agreement is a legal document that lays out the responsibilities and rights of each LLC member. It essentially explains how decisions are made, how new members are added, and when meetings are held. It also discusses how the company is managed and operated. Even if an LLC only has one member, they must still follow the operating agreement.
2. Review the State’s LLC Rules
It is essential that business owners review state laws regarding LLCs as each state may be different. This is especially important if your LLC does not have an operating agreement currently set in stone. If an LLC operating agreement does fail to address rules for adding new members, the business may have to follow their state’s regulations. For some states, this means they will need to dissolve the existing LLC and form a new one when adding the new member.
3. Propose to Amend the LLC Operating Agreement with the New Member’s Information
To update the LLC Operating Agreement, you will generally include the following information:
- The new member’s name
- Their financial contribution to the LLC
- The individual’s ownership share in the company
- Their distributive share of the LLC’s profits and losses
- Their roles and responsibilities
- Their voting rights
As you are adding the new member’s information, it is important to keep in mind that the other member’s ownership percentage and distributive share information will need to be updated as well.
4. Vote on the Change
Once you have updated the LLC operating agreement, you must have current LLC members vote to approve amending the legal document. A majority of states and LLC operating agreements require unanimous consent from all members when adding a new owner.
5. Report the Change to the State
When you decide to add a new owner, you must notify the state. Each state varies on how they are to be notified. For example, some states require that the entity restate their original articles of organization, while others require that you file Articles of Amendment. There are some states that will allow you to update members by adding this information on the LLC’s Annual Report. With this in mind, make sure you are checking your state’s legal requirements as you are adding new members.
6. Prepare for Tax Reporting Changes
If you currently have a single LLC, adding a new member will result in your LLC becoming a multi-member LLC. This means that you will no longer be taxed as a sole proprietorship and will now be taxed as a partnership. Changing to partnership taxation happens automatically so you will not have to file Form 8832 to change to a partnership classification. If you currently have a single-member LLC EIN then you can continue with the same one even with having an additional member. Please know that if you did not have an EIN previously, then you will need to obtain one.
If you are adding a member to an existing multi-member LLC, you will continue to be taxed as a partnership. When it comes time to file taxes, ensure that you issue a copy of your Schedule K-1 to each of the members.
If your LLC has decided to be taxed as a C or S Corporation,you will have to file form 8832 or 2553. It is important that each member complies with reporting requirements of the IRS and other tax authorities. S Corporations cannot have more than 100 owners, so if you add a new member and you are over this limit then your tax status will automatically be revoked.
After reviewing these 6 considerations, hopefully you feel more confident in the steps you will need to take in order to add a new member to your LLC. It is important that you understand the specifics of your LLC operating agreement, your tax situation, as well as your state’s laws as you are bringing someone new onboard. It is encouraged that you seek professional legal advice as well as tax guidance to ensure that you fully understand the requirements and ramifications of your decision.