“Member” is the official term for the owners of a limited liability company (LLC). The number of members involved in an LLC isn’t set in stone. As an owner, you can decide to bring new members on board at any time using this simple step-by-step process.
The Seven-Step Process of Adding a New Member to Your LLC
1. Don’t Rush Into a Serious Business Relationship
You meet someone with a professional interest in your company, and you just “click.” They have great ideas. Their enthusiasm is contagious. The assets they bring to the table could really elevate your company.
Do you add that person as a new member of your LLC?
Until you fully understand the consequences of adding a new member, consider working with that person in a different capacity. Take the time to contemplate exactly what it means to tie your company’s future to this person.
The Consequences of Adding Another Member to Your LLC
Adding another member to your existing LLC isn’t the same as hiring an employee. Once a new member is added, getting that individual out of your company is harder than letting a worker go.
Even if things don’t go wrong with that working relationship, adding new members can complicate things for your company.
Amendments, Negotiations, and Compromises in LLC Ownership
Bringing someone new into the ownership of an LLC may require you to amend legal contracts like your LLC’s operating agreement and formal documents like the articles of organization, which can cost your company money.
Business owners don’t always agree. Choosing a business partner with drastically different views may mean you have to compromise on the way you run your business—and that may not be ideal.
How New Members Affect Shares of LLC Profits and Losses
Adding members to your LLC means giving up a share of your company’s profits to these new shareholders.
Each owner is only entitled to the percentage of profit that reflects their stake of ownership in the company. When determining the terms of the agreement to bring the new owner on board, don’t forget that the profits they will receive from the company come at the expense of the LLC’s current members. Unless the new LLC member adds significant value to your company, taking a cut in your share of the profits may not be a wise business decision.
2. Review Your Operating Agreement
Once you’re committed to adding a new member to your LLC, you need to see what your operating agreement says. An LLC’s operating agreement is a binding legal contract signed by the members of the limited liability company that covers the specifics of owners’ rights, responsibilities, and shares of interest in the business. Your operating agreement should also cover how the LLC will address changes, including adding members to the company.
If your operating agreement doesn’t have the answers you need, you may have to turn to your state’s laws and regulations to figure out what happens next.
Even if your LLC’s operating agreement is clear about how to proceed with adding a member, it’s still a good idea to review your state’s laws. In most cases, state laws establish the default rules an LLC must follow unless otherwise specified by an operating agreement. However, state laws may supersede operating agreements in certain situations, and some states may require LLCs to dissolve and reform with the new owner under certain circumstances.
3. Hash Out the Details of the New Member’s Share of the Company
What share of interest in the company will your new member have? What are the new member’s responsibilities, including their capital contribution, to the business? You need to answer these questions before officially bringing another owner on board.
If you are part of a multimember LLC, you must work with your fellow owners to make these decisions. Your fellow members may disagree not only on the new member’s percentage of the share of the company but also on whether to allow a new owner to join the company in the first place.
Be ready to present your case for why it makes sense to add a new member. Coordinate a meeting so that this individual and the existing LLC owners can get to know each other.
4. Vote on an Amendment to Formally Add a Member to the LLC
The existing members of an LLC have to vote on whether to allow a new owner to join. Typically, an LLC’s operating agreement or a state’s LLC regulations will clarify the requirements for voting a new member into an LLC.
Adding a member to an LLC often requires a unanimous vote. However, some operating agreements allow for this membership change through a simple majority.
5. Update Your LLC’s Articles of Organization
Now that your business has voted to add a member, it’s time to make it official by filing a form to amend the articles of organization that you submitted when you first established your limited liability company.
Filing an amendment to a company’s articles of organization isn’t difficult, but filing fees apply and vary by state. Business owners pay just $15 to file an Amended Certificate of Organization in Nebraska, while other states charge well over $100 to process amendment forms.
The requirement for updating your articles of organization may vary depending on state law. In Delaware, for example, you don’t have to amend your articles of organization just because you added a new member. The secretary of state doesn’t require LLCs to include the names of their members on the Certificate of Formation—Delaware’s version of the articles of organization—in the first place, so there’s nothing to amend.
In some cases, you may need to update the company’s member information with the secretary of state in a different manner, such as through an annual (or biennial) report.
6. Update Your Company’s Tax Forms, If Applicable
Adding a new LLC member doesn’t always mean you need to change your tax status, but in some cases, it may. These instances include:
- Changing from a single member LLC to a multimember LLC
- Changing your tax classification from a partnership or disregarded entity (a single-owner company that, for tax purposes, is not considered distinct from its owner) to a corporation
Do I Need a New EIN If I Add a Member to My LLC?
When you switch your business structure from a single-member LLC to a multimember LLC, it changes how the IRS sees your company for tax purposes.
Unless they elect otherwise, single-member LLCs are treated as “disregarded entities” and taxed like a sole proprietor, under the owner’s Social Security number. When you bring on another member, the company now needs its own tax identification number, called an employer identification number (EIN).
Instead of being taxed as a disregarded entity, the business will be taxed as either a partnership or a corporation. Multimember LLCs filing taxes as partnerships must file Form 1065, also called a Schedule K-1, to tell the IRS how much money each owner received from the business.
Choosing a Corporation Tax Status
LLCs have the option to decide their tax classification. To choose a status other than the default—which, for multimember LLCs, is a partnership—the business must file Form 8832 with the IRS.
It may make sense to consult an accountant or tax attorney to understand the tax burden that goes along with each classification before you file IRS Form 8832.
7. Update Everything Else
After you file a certificate of amendment, you need to update any other relevant documents, such as your operating agreement. The amendment to your operating agreement should include how much stake in the company all the owners have, including the new member, and how much capital each partner brings to the business.
In some cases, you may want to promote the new addition to your LLC ownership team for marketing purposes. For example, you may opt to bring in a member who already has name recognition in the industry you’re trying to break into, such as a renowned chef or a celebrity.
In this case, you may decide to change the company’s name to reflect the new member’s involvement in the business. If the name-change process seems too daunting, you could also opt to simply add a DBA (“doing business as”) to your LLC or establish a series LLC.
Special Considerations for Adding New Members to a Single-Member LLC
Adding a member to your LLC is a big deal, but if you were the sole owner of the company, the impact of this new addition is even bigger.
Can You Add Members to a Single-Member LLC?
Adding a new member changes your company from a single member LLC to a multimember LLC.
Changing single-member LLCs to multimember LLCs has a few distinct consequences:
- Splitting the company’s profits that were once fully yours
- Introducing a need to compromise on business decisions that were previously yours alone
- Removing the disregarded entity taxation status option from your business
Adding a member to your single-member LLC is easier in one way: You don’t have to persuade your fellow owners to agree to let a new member join.
While adding a member to an LLC is a big decision, the process isn’t difficult. Paying attention to details like the language of the operating agreement and the terms of ownership admission as well as setting up a vote among members and filing the right paperwork is all it takes to add another member to your company.